10-year Yield Will fall to 2.25%
A Contrarian View of Rates
As anyone who has been reading these newsletter for years knows, I strongly believe in technical indicators as a way of forecasting where home loan rates are headed. Technical trading is done based not on fundamentals but solely on the math of price movements. If you tell someone you are a technical trader you are likely to be dismissed. I strongly believe that technical trading is able to forecast the yield on 30-year Treasury Bond futures. Why? Unlike other markets this is not subject to shock induced by the likes of weather, strike, or lawsuits. This is not a market in which a lot of small players set the price. This is a market for banks and entities like PIMCO. As such, it is not so exposed to whim. It trades with more sanity than equities or, as an extreme, Bitcoin.
In short, I believe that Treasury market prices, unlike commodity prices, are able to be forecast through the technicals.
Fed chair Yellen addressed Congress this week and her words were designed to assure investors that tapering of QE was not about to hurt the economy. This created what is called “risk-on” which mean “go out and buy risk assets” such as equities and maybe sovereign debt from other nations.” This boosts equities and hurts Treasury prices sending home loan rates up for what should be a brief period.
My point here is that the techs which I include here each week are forecasting that we will soon start a secular bull market. In plain English lower Treasury yields and home loan rates starting soon (1-2 months) and lasting until at least year end.
The techs forecast direction but are oblivious to the underlying causes. The question then is: “What will cause Treasury yields to fall.” I don’t really know but I first will offer some domestic suspects: 1) equities are being bubbled by QEIII. Mainstream economic news is geared almost entirely to a positive spin on equities. 2) The jobs market is bad. Without jobs people don’t have the money to buy stuff and contribute to economic growth. This hit to the jobs market is systemic not cyclical. We are seeing jobs automated and may not have even gotten to the worst of this.
But, in fact, I believe that any flight-to-quality U.S. Treasury buying is more likely to be driven not by news of a flat domestic economy but by adverse news from one of the emerging nations which have started to be of concern to the large banks and investment banks of the world. These countries include Turkey, Brazil, Indonesia, South Africa, and India. It could be that China can no longer disguise its bank problems. I could offer more opinions as to what would trigger this but it would serve better to wait and see.
I follow closely news on economic fundamentals mad that which affects home loan rates and pay little attention to equities. I do believe that the media pumps up equities in the same manner as local newspapers pump up belief in the home team. At present this continues to, along with QE III, create an equity bubble.
The techs are calling for a 2.25% 10-year yield. Remember that.