My intermediate and longer term technical set-up work on 10-year US Treasury yield argues that benchmark yield is in transition from a 35-year bear Market (dominant downtrend) into a multi-year bull market (dominant uptrend).
From 1981, when 10-year yield peaked at 15.84% amid concerns about rampant, uncontainable inflation and stagnant growth (“stagflation”) precipitated initially by the 1973 OPEC oil embargo, benchmark yield steadily and relentlessly declined to a post-financial-crisis 2016 low at 1.32% (see Charts 1 and 2).
From a technical perspective, I can make the case that all of the action in yield from mid-2011 into early 2017—a 5-1/2 year period– represents a major base formation at the conclusion of a generational yield bear market (see shaded area on Chart 1). That said, to confirm the end of the 5-1/2 year transition from bear to bull market, yield must climb and sustain above significant resistance lodged between 2.75% and 3.30%. Yield currently is circling 2.50%.
What conditions might have to be present—or anticipated by investors—for yield to back up into and through the 2.75% to 3.30% critical resistance zone?
There are three market and/or psychological forces, any or all which must be present to propel yield higher to trigger a confirmed new bull trend: 1) actual or expected acceleration of U.S. and global economic growth… 2) incipient, rising inflationary expectations… or 3) a loss of confidence in the efficacy of the U.S. Government (that undermines the value of the U.S. Dollar).
There is little doubt that the new Trump Administration is all about ratcheting up growth from a near decade -long anemic annualized GDP of 2%, to 4% – 5%. Whether the new Administration can pull that off through proposed tax cuts, offshore capital repatriation, and domestic economic stimulus programs—that will “force” the Fed to ratchet-up rates into a new rate-hike cycle, is anyone’s guess. Many stars must align for growth to more than double from the Obama years, and for annual inflation to break the 2% barrier with upside momentum.
While stronger (accelerating) growth, rising inflationary expectations, and a Fed that more than likely will be behind-the-curve , represent the core elements of a traditional expansionary, rising rate cycle, the unorthodoxy and uncertainty of the Trump Administration’s policy prescriptions, and the efficacy of those policies amid a resistant and hostile globalist post-WWII world, present all manner of risks, especially to decades-long trade relationships. The dismantling of long-standing trade agreements initially could, and may irreparably, damage the relatively unrestricted flow of goods and services around the globe, which will undermine a higher growth trajectory.
Should Trump’s policies encounter intense political and global roadblocks, the “Make America First Again” expansion plans might be derailed altogether, which certainly would be a prescription for continued anemic, slow growth, or even recession, and a resumption of longer term, dominant downward pressure on benchmark 10-year yield.
Under such a disrupted economic scenario, juxtaposed against the otherwise powerful technical set-up that argues for the initiation of a new bull trend in 10 year yield, I have to consider that the fallout from failed Trump growth policies could compromise global investor confidence in American leadership, weaken and damage the U.S. Dollar, and precipitate an exodus from Dollar-denominated investment paper (Treasury bonds and stocks).
Too far-fetched? Perhaps.
However, if I have learned a thing or two in my three-plus decades of analyzing and participating in the financial, commodity, and foreign exchange markets, it is to never dismiss out of hand powerful technical conditions for lack of rational reasons. Markets have a way of fulfilling their destiny, somehow.
Exactly why or how 10-year yield manages to back up above 3.30% to trigger a confirmed new bull market is secondary to the continued development of the powerful technical set-up potential itself.