Long-term interest rates are facing a potentially key test on their path to higher levels.
Everyone knows that U.S. interest rates have been in a secular downtrend since the early 1980’s. As a result of action taken during the financial crisis, that downtrend accelerated, creating an “extraordinarily low-rate” regime. As we noted at the beginning of 2017, the 10-Year U.S. Treasury Yield (TNX) finally managed to break above the confines of that extraordinarily low-rate regime — and back into the “normal”, multi-decade downtrending rate regime. In early February of this year, we noted the fact that the 30-Year Yield (TYX) was attempting to break out of its own “extraordinarily low-rate” regime.
As it turns out, the TYX was successful in its breakout attempt, facilitating a swift jump from around 3% up to that resistance that we laid out near the 3.22% level. In the month since, the TYX has gradually pulled back off of that resistance. It is now back down to its “regime-defining” breakout point near 3%. This could be an important test for the long-term rising rates campaign.
In the long-term, we think rates are headed materially higher for years, and even decades, to come. If the 30-Year Yield can hold this ~3% level and rebound in short order, it will bode well for the prospects of a continued march higher for rates in the near-term as well. If the TYX fails to hold here in the 3% area, then it’s a good sign that more work needs to be done, i.e., consolidation or further pullbacks, in the near-term before resuming the long-term ascent.
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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.