Jim Donnelly, Olson Global Markets

Following a week’s worth of evidence that the economic recovery is sputtering, another leg of the “run-to-safety” shift into U.S. Treasury fixed income securities ensued. A spate of better-than-expected 2nd quarter earnings results took a back seat to a number of troublesome reports.

Initially, The Federal Open Market Committee announced that it would reinvest maturing mortgage-backed securities back into the government debt so that its balance sheet would not shrink. This was seen as a signal that economic activity in the U.S. was losing steam. Then, Cisco System’s Chief Executive John Chambers warned that he was seeing “mixed signals” and an “unusual uncertainty” following lower than expected first quarter sales. Adding to Wall Street jitters was an unexpected rise in weekly initial jobless claims to 484,000, the largest jump since February. Disappointing industrial production numbers in the euro zone worried investors’ confidence further. As a result, U.S Treasury 10-year notes ended the week at a yield of 2.688%, the lowest seen since March 2009.

Technically, the yield on 10-year Treasuries continues to decline within a downwardly sloped “trading channel” that has been in place since 1993. Although, weekly stochastic measures are falling rapidly, they are not yet in an oversold condition on weekly charts. Thus, an opportunity for 10-year yields to test key “cross” trend line support (resistance in terms of price) currently at the $2.40% level is possible.

If the 2.40% yield area fails to hold, however, it is worth noting that “channel bottom” support for 10-year U.S. Treasury yields now sits at $1.72%. Conversely, that would represent key resistance when thinking in terms of 10-year note prices. For this area to be tested, however, an extended period of worrisome news would likely be needed.

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By Jim Donnelly, Olson Global Markets

The enormous need for the U.S. Treasury to raise cash now may be coming home to roost. An almost endless supply of U.S. Treasury bills, notes and bonds that have to be auctioned off on a regular basis is now battling corporate debt issuers for investors. This is underscored by the fact that a number of short-term corporate fixed income yields are now trading below those of U.S. treasuries. Further out the yield curve, the spread between AAA corporate bonds and U.S. treasuries has narrowed dramatically over the past 24 months from almost 120 basis points to just 30.

Technically, the yield on U.S. Treasury 10-year notes (TNX) is now approaching key resistance with its price approaching key support (since there is an inverse relationship between the two). A break above the 3.95% level on U.S. Treasury 10-year notes would clearly be reason for concern since the next key resistance area (in terms of yield) sits near the 4.70% area.

Such a move up in yields would not only cost U.S. taxpayers more in interest expense, but it would also likely dampen both housing sales and starts with mortgage rates rising in concert.

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By Jim Donnelly, Olson Global Markets

With a number of fixed income analysts expecting an eventual rise in U.S. Treasury 10-year note yields (due to both a recovery in economic activity and the enormous need for the U.S. Government to raise cash), the direction of interest rate movements continues to confound market participants.

Granted, 10-year yields are now considerably higher than the 2.38% level reached late last year (2008). Part of the explanation for the extraordinary drop to 2.38% is likely due to balance sheet and/or mutual fund considerations at the end of last year’s shaky investment and banking environment. Nevertheless, the direction of 10-year treasury notes has been choppy at best for the current calendar year.

In recent weeks, the 5-month rally in equity markets stalled following a dramatic 50% recovery from the March lows. This resulted in a modest shift back into the fixed income sector. Adding to the move toward treasuries was a growing appetite for safety and/or capital preservation given the seasonal history the month of September. Congress comes back from summer recess, politicians start to propose new ideas, investors get nervous, and the stock market suffers. Conversely, the bond markets generally benefits from these circumstances even though the yield curve tends to steepen.

In any event, U.S. Treasury 10-year note yields are now testing an important level on daily bar charts near 3.25%. Trend line support from December’s 2.38% low as well as key “cross” trend line support dating back to the beginning of 2008 both converge at 3.25% with deeply oversold conditions now present on the daily time frame. If this level proves to be a near-term low, it would be a fair assumption to expect equity markets to rise with allocations increasing for equities and declining for treasuries.

If U.S.10-year notes yields were to drop solidly below 3.25% however, a more pronounced retreat to lower equity prices will likely unfold as well.

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by Jim Donnelly, Olson Global Markets

The bond market finally got the shivers last week when it came to grips with the enormity of the need to raise cash through massive treasury issuance. As a result, the yield on the treasury 10-year note spiked up to almost 3.76% before buyers stepped in at weeks’ end.

This quick rise in longer term interest rates steepened the yield curve and, of course, started to shake up the mortgage and the mortgage refinancing markets just as they were getting a real head of steam.

In addition, the question of future inflation versus current deflationary tendencies moved to the forefront of active debate last week. Commodity prices continued their ascent despite a vast amount of slack in the global economic system. Manufacturing plants are shutting down with workers being idled albeit at a slightly lesser pace than had occurred the prior three (3) months. Nevertheless, continuous jobless claims hit another record high last week with weekly claims still posting numbers north of 600,000.

The dollar index also weakened quickly last week following an early run-up triggered by the well documented nuclear detonation and missile activities both conducted by the rogue nation of North Korea. Nevertheless, it appears that the trend in the dollar has turned decidedly bearish.

Therefore, the real question now is: How bearish?

First off, when looking at “yield” charts the term “resistance” really means “support when thinking in terms of bond prices since bond prices drop when yields rise. Now that this has been clearer up, long-term charts show that “channel top” resistance on 10-year treasury notes sits at 4.85% (in blue). The underside of former yield support (in red) does as well. That means that the 4.85% level represents key “support” when thinking in terms of 10-year note prices.

Supporting this technical view are both long-term Stochastic and RSI studies which favor a rising rate scenario. That said, 4.85% is a whole lot higher than the Friday’s close 3.465%. This, in turn, suggests that the window to ultra cheap mortgage and refinancing money may be rapidly coming to a close.

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