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Summary
- Since the Federal Reserve (Fed) cut 50bp on 18 September, yields across the US treasury (UST) curve have risen.
- Post-FOMC, overbought technical indicators have unwound as yields have risen.
- We remain cautious of a further rise in yields after tomorrow’s US non-farm payrolls (NFP) report.
Market Implications
- Our bias remains to buy USTs on any material price dip, but we await better buying levels post-NFP.
Post-NFP, Yields Have Risen Across the Curve
The current pre-NFP US bond market seems similar to the pre-FOMC situation, which we wrote about on 13 September.
Back then, we cautioned against approaching the UST market. While we had been bullish for months, we expected a short-term correction higher in US yields post FOMC.
In the 2-year tenor, compared to the close of business on 17 September, the yield is now 5bp higher.
Chart 1: 2-Year UST Yield Slightly Higher Post-FOMC
Chart 1: 2-Year US Treasury Yield = Orange Line
The same is true for the 10-year, where the yield is up 15bp over the same period.
Chart 2: 10-Year UST Yield Bounces Post-FOMC
Chart 2: 10-Year US Treasury Yield = Orange Line
The 30-year yield is also up 18bp over the period.
Chart 3: 30-Year UST Yield Also Bounces Post-FOMC
Chart 3: 30-Year US Treasury Yield = Orange Line
Technical Indicators Have Shifted Over Recent Weeks
Pre-FOMC, we argued the strong trend of falling US yields since May had triggered warning signs the market was running out of steam, and we expected a near-term, corrective countertrend reversal higher in yields in the coming weeks.
This expectation was based on the Relative Strength Index (RSI) that we update in our weekly US Rates Technical Report.
On 17 September, we outlined how the outsized US rates rally in recent weeks has driven the Relative Strength Indicators (RSIs) for each of the contracts across the curve to levels either at or very near overbought.
RSIs are only one of the indicators technical charting specialists use to analyse markets.
RSIs are a ubiquitous indicator in technical analysis, and we like them because they are simple and widely used.
By this, we mean the 30/70 rule for RSIs.
When an RSI breaches 30 on the downside, the security is oversold. Conversely, when an RSI breaches 70 on the upside, the security is overbought.
On 17 September, all RSI points across the curve were either above or very near 70 (Table 1).
The short-end was more overbought than the longer-dated maturities, but each of the RSIs were elevated enough for further immediate downside in yields.
Table 1: Pre-FOMC, RSIs Were Elevated Across the Curve
Our most recent US Rates Technical Report shows the RSIs have all pulled back from the overbought levels seen pre-FOMC (Table 2).
Table 2: This Week, RSIs Across the Curve Have Pulled Back
With most RSI readings now sub-60, we argue the technical picture for USTs is much cleaner than it was pre-FOMC.
Nonetheless, the Short-End Pullback Has Been Minimal
Despite the rise in yields and the concomitant drop in RSIs, we remain cautious about buying price dips and re-initiating longs ahead of tomorrow’s NFP.
This is because of the short end.
Even with the rise in short-end yields, the move has been modest, especially when compared to the longer-dated maturities.
And because the move has been less pronounced, the move in the 2-year (TU) RSI has also been modest. At 65.1, the RSI is still elevated, even with the pullback from 75.
As a result, we fear scope exists for the 2-year UST yield to correct higher from here.
This is especially true since, even after last month’s 50bp Fed cut, there is still a lot (almost another 75bp) of easing priced for the two final FOMC rate decisions this year.
We remain biased to buy USTs on price dips. We think the trend of lower yields that began in May is still durable and sustainable.
We also expect better buying levels.