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Yield Breaks Down Generating Headwinds for Stock

David Becker
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www.iforex.com
Yield Breaks Down Generating Headwinds for Stock

Yields finally broke down on Friday and could continue to tumble if this week’s data reflects growth.

The 10-Year Treasury Yield jumped sharply last week to the highest level in two months. That is the biggest jump in bond yields since the start of the year. The fact that the two-year yield rose to a new three-year high this week has raised expectations for a more aggressive Fed policy to be announced this week. Not a rate hike, but possibly a more hawkish tone at Wednesday’s Fed meeting. Since long and short-term rates usually trend in the same direction, any hint of Fed tightening would raise all maturities. Investors are already selling their bond holdings.

The 20+Year Treasury bond iShares (TLT) falling below its 2014 support line. The 7-10 Year T-Bond iShares (IEF) is doing the same. That breakdown suggests that the 2014 bond rally may have run its course. Treasuries are not the only bond prices falling. The iBoxx Investment Grade Corporate Bond iShares (LQD) having the worst week since the fund’s rally started a year ago. The last time that bond fund turned lower was during the “taper tantrum” of spring 2013 when bond yields jumped sharply.

iBoxx High Yield Corporate Bond iShares (HYG) falling to a one month low after failing a test of its summer high. The appeal of high yield bonds is largely predicated on lower competing Treasury yields. That being the case, an upturn in the Treasury yield poses a threat to high-yield bonds. The presence of a potential double top on the HYG chart is another sign that the high yield bond rally may be ending. After breaking through support near the 50-day moving average the next level of target support on the HYG is seen near the 200-day moving average at 91.88.

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