Courtesy of Doug Short.
Below is a chart of 30yr T-Bond yields, dating back to late 1993. Notice the down-trending channel formation that the yields have formed as they have steadily moved lower. This channel is depicted as the downward running parallel blue lines. Also notice the large wedge formation (e.g. the green triangle) that was formed when the global financial crisis began to unfold. You can see how in August of last year yields broke out of the wedge formation and began moving lower, a very bearish signal for yields.
The yields have currently consolidated into the 2.7% to 3.3% range since September of last year. This consolidation is represented by the much smaller red triangular wedge that may be the flag on an inverted bear-pennant. A break-out down from this pennant flag would project a move below 2.5%, and down to the 2.12% level. I know your jaw just hit your desk, but an even bigger observation follows that likewise projects yields down to this absurdly low level.
If you look at the two red arrows, you will notice that they seem to look like the two tops of a giant capital ‘M’. This is a chart formation called an ‘M Top’. The neckline for the ‘M Top’ is represented by the thick red horizontal line at the bottom of the ‘M’. This pattern likewise has 2.12% as its minimum projection for yields. This projection is depicted by the horizontal purple line; and notice that the apparent slope that would prevail would still allow for yields to remain within the trend-channel.
Wow! Not even T-Bond bull Gary Shilling has called for 30yr Treasury yields under 2.5%, which marks the low achieved during the height of the crisis in late 2008. Please realize that no analysis is guaranteed; and this one is certainly not. But if (and almost no one expects this) 30yr T-Bond yields do go down to 2.12%, risk assets (e.g. stocks and commodities) will probably not fare well. In fact, even though deflationary forces remain, it would probably take another round of ‘flight-to-quality’ in order to achieve the ‘M-Top’s’ objective. I leave you with one final thought. After trillions of dollars of stimulus, back-stops and guarantees, 30yr T-Bond yields hover precariously around 3%, just 0.5% higher than during the depths of this crisis; and during a period in which many are suggesting economic improvement is at hand. To me this seems eerily reminiscent of Japan.
Finally, the ‘M-Top’ would be considered a failed pattern if 30yr T-Bond yields ever rose back above 3.6% with upward momentum; and a break-out of the red pennant to the upside might be a signal that this possibility should be more strongly considered. But for now the trend is definitely lower for 30yr T-Bond yields.
Dominic Cimino
Email Dominic: dcimino643@yahoo.com
? 2012, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at www.ppcplanning.com) Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.
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