Image Source: Pixabay

Let’s discuss the fundamental and technical picture of long-term bonds.
 

(Click on image to enlarge)

Some believe in technical analysis, others don’t. Those who don’t believe don’t understand it.

The primary use is not to predict anything, but to provide decent entry points for trades.

That said, there is generally a default expectation.

The default expectation of a descending triangle is lower, and this is a neatly formed triangle.

10-Year Treasury Note

(Click on image to enlarge)

One can make a case for a symmetrical triangle or a descending triangle, but neither would be as clean as the lead chart.

However, the 10-year yield and 30-year yield are nearly certain to break the same way. This is further evidence of valid patterns.

The symmetrical pattern is a continuation pattern. But continuing what? The most likely answer is a continuation of the January yield high above 4.75 percent.

The Fundamental Picture

What do the fundamentals suggest?

The Treasury bulls think inflation is improving and the Fed should cut interest rates. The bears will cite the recent Producer Price Index PPI report, adamant inflation is too high. They want the Fed to hold pat or even hike.

The fence sitters like Powell have been saying there is not enough information to do anything.

Certainly, we do not know what Trump will do with tariffs (or anything else), and how the markets will react to that.

For now, the Fed and the markets have bought into the idea that tariffs will not be as bad as once feared.

Fundamentally there is a position for that too. Trump has granted a lot of USMCA exceptions. That’s important because Mexico and Canada are our biggest trading partners.

The Labor Market

My view has been along the lines of “Does the labor market crack before the inflationary aspects of tariffs kick in?”

The Fed sees the labor market as strong, which I find preposterous.

The latest PPI report is very troubling, so how fast do jobs crack?

The technical charts can break either way, but they suggest the labor market concerns override the PPI.

That’s my view at the moment, but we need to see the next jobs report and the next CPI report.

Then, it’s not the reports that matter per se, but rather the market reactions to those reports that matter.

Risks to the Downside

I side with Powell and his newfound belief regarding downside risks to the labor market.

In fact, I have been harping about jobs for quite some time, expecting the negative revisions that happened.

Payroll Disaster

On August 1, I discussed the Payroll Disaster, Jobs Rise 73,000 but Massive Negative Revisions:

There were 258,000 negative revisions in May and June.

The labor market is much weaker than most economists realize.

For specific details discussion of why we know this. please see QCEW Report Shows Overstatement of Jobs by the BLS is Increasing.

Finally, please note that 5 Million People Have Exhausted All Their Unemployment Insurance Benefits.

So, will rate cuts fix a weak labor market? We are about to find out, but my answer is no.

The Long-Term View

Everything above addresses the short- to intermediate-term picture. That’s a tradeoff between deteriorating jobs, weakening trade, and tariffs.

But please note that US Debt Now Grows by $1 Trillion Every 150 Days.

Tariffs are bringing in more money (but Trump now wants to redistribute it). Unfortunately, tariffs bring in money in the worst possible way. They impact small businesses and bottom-level income groups the most.

As implemented (even without the kickbacks), tariffs redistribute money from the poor to the wealthy. They slow trade. Bringing jobs back to the US is expensive and will raise prices.

The build here process adds to GDP for now, but making the US a trade island doesn’t over the long haul.

No one in ether party is doing anything to reduce spending. Trump’s grand experiment is doomed. It’s right for Powell to be concerned.

Fighting the Last Battle

There is one more piece to the puzzle, and that is the Fed’s propensity to fight the last battle.

Powell and the Fed is still shellshocked over inflation that got out of hand from 2021-2023.

The Fed will not want to repeat that mistake, and that means it will be slower to cut rates than the market is expecting.

This is fundamentally very supportive of lower long-term yields.

If a Trump clone gets his way with big rate cuts, expect the opposite unless the economy takes a big recession dive.

More By This Author: