For the past month, the day-to-day movement in the stock market has been squarely focused on US interest rates as the yield of the benchmark 10-Year Treasury Note has recently made a sustained move back above 3.00% — for the first time since mid 2011.  These yields closed at 3.11% yesterday, May 17th.   Rising long term interest rates amid a tightening Federal Reserve, although indicative that the Fed has confidence in the sustainability of recent economic growth, can eventually become a drag on equity prices as the cost of borrowing  increases.

The charts and text below are an excerpt from our May 16th Keys To This Week report (access requires subscription) for US interest rates and Treasuries, showing Keys #3 and #4 of 10 — which we provide to subscribers every week.  (Separate Keys To This Week reports are produced for the US stock market, US market sectors and industry groups, and economically-influential commodity prices like crude oil, copper, and gold.) 

The charts show that long term US interest are currently at a major inflection point, from which the recent rise in rates can either accelerate further  — putting downside pressure on US stocks — or begin a significant reversal that can potentially push 10-Year yields back below 3.00%.

 

excerpted from

Keys To This Week, May 16th 2018: US Interest Rates & Treasuries

Support/Resistance & Trend: The Yield of the US 10-Year Treasury Note. MAJOR DECISION POINT.  The red highlights in Chart 3 below show that the yield of the benchmark 10-Year Treasury Note is currently testing major, long term resistance at 3.04% to 3.13%, which represents the December 2013 benchmark high and June 2003 benchmark low.  Major levels in yield like this one are typically not significantly and sustainably broken without at least a several week corrective decline first.

Chart 3 of 6

Support/Resistance & Trend: CBOE 10 Year Treasury Note Yield Index (TNX). MAJOR DECISION POINT. The red highlights in Chart 4 below show that TNX, which is based on 10 times the yield-to-maturity on the most recently auctioned 10-year Treasury note, is also testing major, long term resistance, at 30.83 to 31.00, which represents the June 2003 benchmark low and February 2000 major downtrend line.  This equates to a 3.08% to 3.10% cash 10-Year Treasury yield.  Again, major levels in yield like this one are typically not significantly and sustainably broken without at least a several week corrective decline first.

Chart 4 of 6

Market expectations for more Fed rate hikes, according to the CME Federal Fund futures contract, are currently pricing in a 95% chance of another 25 bps hike to 175-200 bps at the June 13th Federal Open Market Committee Meeting.  This has helped keep steady upward pressure on long term US interest rates. 

A sustained rise above 3.13% in US 10-Year yields would indicate an emerging secular trend change, toward higher long term interest rates, and would clear the way for a potentially quick move to the 3.34% to 3.68% area, leading to an eventual move to 4.00% later in the year.  This would be expected to have an adverse effect on the US stock market. 

Conversely, if 3.13% holds as yields begin moving back down, this should help to fuel a stock market rally to new all-time highs.


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This report is provided for information purposes only. Past performance may not necessarily indicate future results. No inferences may be made and no guarantees of profitability are being stated by Asbury Research LLC.  The risk of loss trading in financial assets can be substantial.  Therefore, you should therefore carefully consider whether such trading is suitable for you in light of your financial condition.

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