Notes from the Desk: Technically Speaking, the 10-Year Treasury Could Drift Higher
January 19, 2018 By Sage Advisory
Technical indicators can be a useful tool for bond managers, particularly when combined with traditional fundamental/valuation methods and good old fashion macro research. In this piece, we address what the technical indicators are telling us about the potential path of the 10-Year Treasury yield.
From a technical perspective, the 10-Year Treasury yield is testing the three-decade long secular bull market resistant trend line of 2.63%. Barring another false breakout, a break of 2.63% would put yields in a technical gap that could move yields up to a 3.00% very quickly. In this environment, diversification and active management are the keys to success for bond investors.
The chart below illustrates that the long-term trend line of 2.63% (orange line) is close to intersecting the Fibonacci resistant level of around 2.61% (grey line). Fibonacci levels tend to be well respected support/resistant areas where a break-out occurs or serve as the proverbial line-in-sand that does not get crossed. Historically, once the trendline is broken though, a reversal pattern becomes a higher probability event.
Although a trend change in the 10-Year Treasury yield may sound frightening to bond investors, the technical charts provide a well contained, and range-bound, move in the 10-Year yield if the long-term resistant level is broken. If broken, the 3.00% level is not only supported, but also coincides with where the 5-year average real rate indicator suggests the 10-year rate should be.
As referenced in the chart below, although a sharp rise of the 10-Year Treasury has historically exhibited negative performance for the 10-Year Treasury, a well-diversified portfolio of bonds, as represented by the Barclays Aggregate Index, has performed quite well in those environments.
Additionally, active management through duration tilting and curve positioning are tools to limit, or even benefit from, the effects of rising rates. In addition, prudently adding spread product can potentially offset a rise in rates as spreads tend to be more stable and offer addition interest income carry. For Sage clients, one of the major benefits of active fixed income management continues to be adjusting portfolio characteristics to maximize returns in any interest rate environment.
Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.
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