US Treasury yields heading higher; target 2%

  • US 10-year yields have driven higher after breaking through a 2-year bear trend
  • Yields remain within a 30-year bear channel but are expected to test 2% over the coming 12 months
  • 1% has become an inflection point, with any future break below it likely targeting zero yields
US Treasury yields heading higher; target 2%

Support and resistance levels table

Caveat: Charting yields can get confusing, so when we use the term "bullish", we are referring to an expectation of a rise in yield, not the price of Treasuries themselves – which is inversely correlated.

U-turn

The US 10-year Treasury yield has taken a U-turn over the past six months – currently sitting at 1.357 – and is set to drive higher over the next 12 months. The recent uptick looks particularly long-term bullish, because:

  1. Yields broke through the top of the 30-year long bear channel in 2018, before ultimately turning back down back into it. Breaching such a significant channel clearly signalled a willingness to push higher.

  2. The all-time low of 0.318 last year never made it all the way back down to the bottom of the channel. If the market was content heading lower, it should have made it to the bottom with ease; however, we now have a bullish gap at the bottom of the channel as we turn back up.

  3. We have broken above the smaller expanding bear channel that began in 2019. This provides a clear shift in momentum, with most indicators suggesting the current leg is stronger than those before it.

Fat tails

Our model forecasts a steady upwards move in yields on average; however, the standard deviation of the simulated trajectories is larger than one would expect. Clearly, the average obscures some of the downside risk that is present because every trajectory that finds itself with a monthly close below 1% leads to a further move down to ~0%. Managing this type of position with a tight margin for error seems sensible because the result of a shock could be significant.

Read my primer on Quantitative Technical Analysis here (complete with a video on my methods and the benefits of combing traditional technical analysis techniques with cutting-edge machine learning).

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