Fed Meeting Could Create Inflection Point for Bonds
This week could mark an inflection point for Treasury bonds because the Fed makes its policy statement on Wednesday and the economic docket is overflowing with reports. The Fed begins its` two day monetary policy meeting on Tuesday and is expected to keep rates unchanged and reduce its bond purchase program by another 10 billion dollars.
The fundamentals alone do not make for the inflection point. Rather, the reaction to these fundamentals could trigger a consolidation break in the 10-YR Treasury Yield which is trading in a large a large consolidation between 2.4% to 3% area. Within this large consolidation, there is a smaller, and tighter, consolidation taking shape since late January. Resolution of this smaller consolidation could have ramifications for stocks and gold.
In a nutshell, stocks and the 10-YR Treasury Yield are positively correlated and move in the same direction. Gold and the 10-YR Treasury Yield are negatively correlated and move in opposite directions. The three month consolidation with support in the 2.6% area and resistance just above 2.8%. These are the levels to watch this week. An upside breakout would argue for a move above 3% and this would be bearish for Treasury bonds. A downside break would signal a continuation of the January decline and could lead to a bigger support break on the weekly chart. Such a decline would be bearish for stocks. The moving average has been positive this year as stocks and the 10-YR Treasury Yield move in the same direction. Expect stocks to react and move in the same direction as the 10-YR Treasury Yield.
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