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Bond Yields Correct, but the Trend is Higher

David Becker
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US yields edged lower on Monday and continued to decline back toward support levels after surging back to the 2.80% level late last week. Bond investors continue to face conflicting signals as economic data is mixed, but the Federal Reserve is steadfast in its opinion that rates will remain low and QE will be prevalent for the foreseeable future.

Bond yields began their rise on May 22, 2013 when Fed Chairman Ben Bernanke told the investor community that tapering would occur if economic data started to gain traction. The market took this message as rates will likely move higher before they move lower which pushed the 10-year yield from 150 basis points to a 2-year high near 3%. A bond investors became convinced by the Fed that QE would remain steady until sometime in 2014, yields declined back to 2.68%. Unfortunately for the housing market and long only bond investors, the long bull market in bonds is likely over.

The trend in the bond market is negative for price, but in the short term the 10-year yield could continue to move lower. 10-year note yields are hovering near the 50-day moving average and a break below 2.66, would likely lead to a test of support near the October lows at 2.5%. Target support below this level is the 200-day moving average which is seen near 2.32%.

Momentum on yields is pointing to lower levels with the MACD (moving average convergence divergence) index poised to generate a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread. The index is poised to move from positive to negative territory which would confirm the sell signal. Lower bond yields would reflect weakening fundamentals, which has played out with weak industrial production, and potentially soft retail sales.

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