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Why The Massive Plunge In Yields May Be Over

By Michael KramerBondsAug 23, 2019 03:09AM ET
www.investing.com/analysis/why-the-massive-plunge-in-yields-may-be-over-200457842
Why The Massive Plunge In Yields May Be Over
By Michael Kramer   |  Aug 23, 2019 03:09AM ET
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Global bond yields have moved sharply lower since the middle of July when the European Central Bank (ECB) and the Federal Reserve (FED) both indicated accommodative monetary policy was on the way. However, the sharp declines recently witnessed in bond yields may not only be about to end, but they may also be on the verge of reversing higher.

The spreads between U.S., German and Japanese bonds have been contracting, a sign that the global bond market may be coming back into alignment after reaching historic highs. Additionally, the technical chart suggests that yields in the U.S. and Germany may be on the cusp of rising.

Sharp Declines

Since the middle of July, the rate on the German 10-year bund has plunged by 50 basis points reaching a low of around -0.70 basis points, a historic low. Additionally, the 10-year U.S. Treasury plunged by nearly 65 basis points to a low of roughly 1.5%. That has resulted in the spread for bonds between the U.S. and Germany to fall to 2.25% from approximately 2.40%.

The Spread

The spread between the two bonds reached a high of about 2.8% in November 2018, its widest since 1989. With the spread at near-historic levels, iU.S. bonds became attractive not only from a pure yield perspective but also based on valuation.

UST 10-Year Vs DE 10-Year Chart
UST 10-Year Vs DE 10-Year Chart

However, now the spread is contracting and may be set to continue shrinking, as investors rush into U.S. bonds trying to take advantage of the favorable rates. Should this happen, it would slow the rise in U.S. yields compared to the increase in German yields, thus causing the spread to contract further. There are signs now developing that would suggest that the spread may continue to contract toward 1.95%.

The same scenario has also been playing out between the U.S. and Japanese bonds in recent years. The spread between the two bonds reached their widest point since the year 2007, when they widened to roughly 3.1%—a level they reached in November 2018 as well. Now, that spread has contracted to around 1.75%, its narrowest since late 2016.

A Reversal

The technical chart shows that the U.S. 10-year yield has reached oversold levels on the relative strength index—below 30—on two occasions since June. Additionally, the RSI is now beginning to trend higher, despite the yield falling to a new low. That is known as a bullish divergence—a sign that the recent decline in yields is likely to reverse. Also, the 10-year yield has risen above a downtrend, which could result in the rate rising to around 1.80% over the next few weeks.

UST 10-Year Daily Chart
UST 10-Year Daily Chart

Another sign that yields are about to rise is the technical pattern for the German 10-year bund. That chart shows that a bullish reversal pattern known as a falling wedge has been created. It also shows that the German 10-year is nearing a potentially big breakout, should the yield rise above technical resistance at negative 60 basis points. If that happens, the rate could increase to around negative 40 basis points.

DE 10-Year 60-Min Chart
DE 10-Year 60-Min Chart

Further Contraction

If both U.S. and German yields rise, it could result in the spread between the bonds shrinking even further. The spread back to a historical alignment could suggest that the sharp decline in U.S. yields has come to an end and that global bond markets move on a more even footing going forward.

A lot, of course, will depend on just how much easing central banks provide to their respective economies. Based on current interest rates, it would seem the Fed may have a lot more room to maneuver than the ECB.

All this may suggest that the recent plunge in rates has seen its lows, at least in this cycle.

Why The Massive Plunge In Yields May Be Over
 
Why The Massive Plunge In Yields May Be Over

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Pascal Roduit
Pascal Roduit Aug 26, 2019 12:17AM ET
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Central bank have been over using the rate to try to control the financial flux now the situation does not react anymore , the basics values of societies was money, it is still to a certain level true but the need to sustain global happiness is present in every aspect of life diminishing the equation more money = more happiness.
shark tank
shark tank Aug 25, 2019 3:27AM ET
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U.S. rates are ultimately headed to zero, and maybe negative. Don't believe otherwise
Cornel Pod
Cornel Pod Aug 24, 2019 4:13PM ET
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totally agree. looking at the RSI on the monthly us10y one finds the lowest readings in the past 30 to 40 years and only three other occasions were lower in RSI(7) than at this point so in my humble opinion, we may be near the lows for a while.
John Larch
John Larch Aug 24, 2019 1:04PM ET
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1+% a low spread? A low spread is one so low that it would stop attracting overseas investment. There's still a long way to go.
Kevin Avila
Kevin Avila Aug 23, 2019 6:22PM ET
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It is over...
daryl chamberlin
daryl chamberlin Aug 23, 2019 6:21PM ET
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Real genius insight here. Yields plummeted across the board today. Another case of meaningless data analysis without understanding the macro picture and outlook. It likely isn’t over until we get much more clarity on China. Brexit, etc
Cornel Pod
Cornel Pod Aug 23, 2019 6:21PM ET
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nothing meaning was in the data analysis. I took a look at the US 10 back in November of last year and noticed the makings of a bear wedge with a projected yield it at in the past few weeks surpassed the lows but not by much yes it is predictable
洋 李
洋 李 Aug 23, 2019 6:04PM ET
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i was expecting a consolidation of bond yield. but china's tariff retaliation and trump's twitter are so beyond expectation. apparently, this war won't finish this year.
Cornel Pod
Cornel Pod Aug 23, 2019 6:04PM ET
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A break below Oct 2018 lows I. the Hang Seng ma change that. This problem is bigger than China and Trump since it is been going on for the past 30-40 years we have deflation worldwide.
Sean Kang
Sean Kang Aug 23, 2019 4:20PM ET
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10 years rate will follow 30 years’ and reach historical low very soon...LOL
Dante Valerian
Dante Valerian Aug 23, 2019 11:33AM ET
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Congratulations on your brilliant call. Yields down 4% since you posted this.
nick bryson
nick bryson Aug 23, 2019 9:39AM ET
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Favorable rates? Buying bonds under 2% is favorable? There are savings accounts with Citi bank at 2.5%. This article doesn't make any sense.
Mike DeFonso
Mike DeFonso Aug 23, 2019 9:39AM ET
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Citi bank savings account at 2.5%?  No chance.  Not now.  6 months ago maybe.
Mike DeFonso
Mike DeFonso Aug 23, 2019 9:39AM ET
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Just looked.  It's capped at 2.00% as a PROMOTION, must keep $25k in there.  And it doesn't get higher than that even if you have $2million in an account there.  Vanguard offers 2.16%, highest I've seen anywhere.
Ahmed Bajkani
Ahmed Bajkani Aug 23, 2019 9:38AM ET
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give me mt4 account number
Vladlen Vronsky
Vladlen Vronsky Aug 23, 2019 9:38AM ET
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Just create your own...?
jim boblooch
jim boblooch Aug 23, 2019 7:11AM ET
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thanks
Patrick Alain
Patapa Aug 23, 2019 6:55AM ET
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Rise in yield is due to massive buying by banks, in fact buying of collateral
 
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