Chart of the Week: 10 Year Treasury Yield
This week we’re gonna be focusing on the 10 year Treasury yield; it’s not the bond, but it’s the yield. It’s the TNX. Let’s take a look at this chart because it appears the yield is starting to roll over again.
10 year Treasury yields rose sharply before falling
Much like we saw back in October when we peaked, we came down and rolled under. And once we got under that 20 day moving average, which is this dotted line over here, the yields went tumbling down, and the stock market went up. And more importantly, it took small cap stocks up with it.
Here we are again with the yields having risen sharply from the start of the year. Actually, right at the end of 2023 was when we put in the bottom of our yield at just under 3.9%. We rose all the way up to 4.7. That seems to be the top for this cycle right now. And you can see that line over there – right around 4.725 or 4.73.
But we’ve come down sharply and we’ve crossed back down below that 20 day moving average. We reached the bottom of the Bollinger bands. That means yields could probably bounce a little bit over there. We could get a bit of a move up there, back down over here. But it seems to me that the downtrend is in place and we’re going to be making lower numbers on the 10-year yield.
What does that mean? Bonds are rallying. Bond prices are going up. The TLT is moving up. We have seen a sharp move up in the TLT from about the mid-80s up to about $90 at close at yesterday. Yields went down nicely yesterday and the stock market rallied in kind – actually on Monday – the stock market rallied in kind with bond yields coming down. That is usually a positive for the markets when that happens.
Small caps are benefitting
But getting back to the small caps. When interest rates are starting to come down, it means costs for small cap companies is also starting to decline – so borrowing costs.
What we’ve noticed quite often is, when yields come down, you see money start piling into the small-cap indices the IWM, the IWN, which is the value small cap index. IWM is the small cap growth. And we see a lot of these stocks starting to outperform. And we saw that a little bit on Monday this week.
I think if you take a look at the indicators as well on the TNX, you’ll see that full stochastics have rolled all the way down to an oversold rating. We have a MACD crossover here. And we landed right on that lower Bollinger band approaching the 50 day moving average and the 100 day moving average as well.
Another drop could mean a turn back up in yields
If we get a little more of a drop in yield – about 4.3 – I think we’re probably going to turn back up in yields. That may not be very positive for the market, but it probably just means the market is getting a little too anticipatory of rate cuts coming in later this year. We know that of last week, after the Fed meeting, the market is pretty much priced in about one rate cut by the end of 2024. It’s actually not even 100% – it’s about 75 – 80%. Some of that value come back into the rate cut as of the last couple of days, especially since the jobs report came in weaker than expected on Friday, May 3.
So we’ll have to see what happens here with the yield. But I think as long as yields start coming down, it’s gonna be a positive for equities, and especially for small cap stocks. So that’s the 10 year Treasury yield.
I think it’s got some room to come down to about 4.3. It’s about 4.459 right now. Down to about 4.3 would probably be a spot where we could see it turn back up.
We do have a bit of an uptrend in place, and again, this uptrend line comes down to about 4.39 to 4.4. So if we come back down to hit that test line, we’ll see what happens. But again we could bounce right back up and come right back down again. Make a higher low in this chart and break down again.
There are some areas of support down here on the yield. We could come back down a little bit more. But I don’t think it’s going to be too dramatic here unless the Fed is really going to get aggressive talking about rate cuts. Don’t think that’s gonna happen later this year, so we’re kind of stuck in this range – let’s call it 4.2 on the low end of the yield to about 4.65 – 4.7 on the high end.
And that’s the 10 year Treasury yield.
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