Markets can be irrational and oftentimes emotional.  How do you spot when sentiment changes and the market is pricing to a new normal?  The answer: by analyzing data and identifying psychological barriers known as resistance and support levels.  When those barriers are broken, it generally represents a new normal, a new collective opinion or outlook.  In other words breaking trading ranges really does mean something and should be acknowledged.

Five solid months in this tight range between 2.30 and 2.60% on the 10yr.  From a Wall Street perspective that’s greater than dog years.  Some may say that the real floor to be broken was the 2.22% that was established right after the election.  OK fine.  Observe the 10yr chart below and you will notice the red lines, which represent the 2.22% floor established on November 16th as well as the breaking of that floor this week.  A technical analyst would say the next level of support in a retracement scenario is 1.80%, but will rates really fall that low?

That is the big question.  The 10yr currently trades right back at 2.22%, so are we establishing a new range or are we in a period of transitioning to much lower rates?

Geopolitical issues are dominating the headlines.  Inflation has been mute and it will be contained for the foreseeable future.  Sudden growth concerns and the whole cause of the stock market rally post-election related to Reflation is starting to reverse.  Rates appear to be headed to a freefall and what hits the headlines in the next week will likely determine if there is resistance to lower yields.  If more negative press hits the airways, then 1.80% on the 10yr is very possible.  It’s less about economic data right now as the calendar is light and more about Q1 earnings and the geopolitical environment.  Grab any newspaper and you are more likely to read about all the problems the world is facing than you will see related to above normal growth and reflation. 

Hard vs Soft Data – Economic data is available in two varieties.  Hard data are facts such as GDP, unemployment, inflation, etc.  Soft data are things such as optimism and confidence surveys.  They are opinion or feelings-based measures.   Soft data right after the election was driving mortgage yields and stocks higher.  With the defeat of the health care overhaul and a higher likelihood of tax reform failure, that soft data could point the market the other direction.   The pendulum always swings both directions and right now it’s swinging rates down.  So far nothing is standing in its way.

The trend is your friend but let’s not declare victory quite yet.  The FOMC still wants to raise rates even though the market is pricing less and less odds every day.  In fact the second chart below is the 3 month to 10 year Treasury spread.   The Fed controls short term rates but the market dictates long term rates.  If that spread between those two rates continues to collapse, it’s the market telling you a recession is imminent.  There is still lots of earnings data to be released as well as Brexit, legislation, trade negotiations, the border tax/wall, North Korea, Russia, the French election, etc.  Let’s get through that and see where rates are headed.  My vote is establishing a new range here with breakout possibilities based upon the collective headlines.

Have a great day.