The Bottom Line: History Matters
The recent rise above 1.37% to 1.47% in the yield of the benchmark 10-Year Note appears to be an emerging secular trend change, toward significantly higher long term US interest rates. A sustained rise above a 1.70% yield in the 10-Year would clear the way for a quick move up to 2.05% which, if reached, would be its highest level in almost two years.
The yield of the US 10-Year Treasury Note, the benchmark measure of long term US interest rates, finished last week at 1.73%. This is its highest level since January 2020 and equates to a huge 119 basis point, 215% rise from its 0.55 bps closing yield on July 30th, 2020. It represents an emerging long term trend change toward significantly higher long-term US interest rates in the weeks, months, and potentially years ahead.
Moreover, this recent sharp rise in long-term US interest rates corroborates the inflation fears that have been swirling around the markets and can be seen in rising inflation expectations, rising commodity prices, and a weakening US Dollar.
US 10-Year Treasury Yields Over The Past Decade
Chart 1 below plots the weekly closing yield of the 10-Year Treasury Note since 2012 along with its 13-week (blue line) and 52-week (orange line) moving averages. We use these moving averages to define the quarterly and annual trends, both which are currently positive as yields are trading well above both of them. This simply means long term interest rates are trending higher.
This positive trend comes on the heels of an annual trend of sharply declining yields between December 2018 to November 2020, during which they collapsed from 2.85% to 0.55%.
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More important, the chart shows that very formidable overhead yield resistance at 1.37% to 1.47%, which represents the July 2012, July 2016, and Aug 2019 lows, has just been broken by higher yields. When previous benchmark levels like this are broken, it typically leads to a lot more strength and at least a test of the next key level on the chart — which in this case is at 1.70%.
The 1.70% level is being tested now, and may be in the process of being broken to the upside. If this is indeed the case, it would clear the way for a test of the next overhead yield level at 2.05% which represents the September 2017 benchmark low. Equally important is that the 1.47% to 1.37% area now becomes primary underlying yield support, which means it should become the floor for the next big move higher in long term US interest rates.
US 10-Year Treasury Yields Over The Past Century
Chart 2 below plots the monthly closing yield of the US 10-Year Treasury Note since 1900. The red highlights show that the 1.37% to 1.47% yield area also includes the November 1945 lows that were set two months after the end of World War II, making this level even more important. The historical importance of 1.37% to 1.47% is why we believe the current move to 1.73% is so significant, and why the 1.37% to 1.47% area is likely to become the launching pad for a much bigger move higher.
This very long term chart also shows that, above 1.46% to 1.55%, the next significant overhead level is at 3.00% to 3.35% — almost double Friday’s closing yield. Although a 3.00% 10-year yield may be hard for some to wrap their head around, the blue highlights on the chart show that the US 10-Year’s average monthly yield since 1900 is 4.55%. And, as an older American who purchased his first home in 1988 with a 30-year fixed mortgage of around 11.0%, a 4.55% 10-Year yield does not seem that far-fetched.
Wrapping It All Up
40-plus years as a financial market analyst has taught me to pay close attention to history because the market has a memory, and history repeats. The recent rise above 1.37% to 1.47% in benchmark US 10-Year yields represents a very important positive shift in in their historical trend, towards even higher rates. This shift to a rising interest rate environment can already be seen in rising inflation expectations, rising commodity prices, and a weakening US Dollar. And should it continue, which history suggests is likely, it will eventually have a significant adverse effect on the US stock market.