TLT Overbought Near Term – Path Of Least Resistance Down

The 10-year T-yield dropped from 3.24 percent a month ago to last Thursday’s intraday low of 2.83 percent. The daily chart is grossly oversold. A rally looks imminent near term, meaning TLT is headed lower.

US average hourly earnings for private-sector employees rose six cents month-over-month in November to $27.35. They increased 3.05 percent year-over-year, coming on the heels of a 3.10-percent rise in October. This was the first time since April 2009 wages grew with a three handle (Chart 1).

Historically, wage growth is still subdued, but it has trended higher for at least a year now. Ordinarily, November’s back-to-back increase with a three handle should have crystallized markets’ concerns for an increasingly hawkish Fed. Not this time.

Last Friday, the two-year Treasury yield – most sensitive to markets’ expectations of the Fed’s monetary policy – fell four basis points to 2.72 percent; it peaked at 2.97 percent a month ago. The 10-year T-rate shed three basis points to 2.85 percent; it has been under pressure since touching 3.25 percent on October 5.

A lot has changed in just a few weeks.

Next week, the FOMC meets (18-19). The odds in the futures market for a 25-basis-point hike are currently 71.5 percent, which of late has come down, but high enough to make a hike look probable  Markets will be on pins and needles as to if the dot plot shifts lower. In the prior meeting, FOMC members expected three hikes next year. Markets expected one. In recent weeks, a few members have dropped hints that the dot plot’s forecast may be a little aggressive.

By next week’s meeting, assuming the Fed hikes, the fed funds rate would have risen to 225-250 basis points, up 225 basis points since December 2015.  At the same time, the 10-year has struggled to follow short rates higher. The 10s/2s spread currently stands at 13 basis points – the lowest since June 2007, and pretty close to inversion. The long end is warning the Fed not to get too tight.

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Disclaimer: This article is not intended to be, nor shall it be construed as, investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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