US10Y Technicals – Bearish Breakout Continues

Since the breakout of the 124.3 3rd Sep swing low, prices have been continuing lower, making short work of the 124.0 round figure and trading around 123.5 currently. This decline has been attributed to increasing fear of a QE Tapering event, triggered by improving economic numbers released this week. Yesterday was no different, with ISM non-manufacturing index soaring to an 8 year high, sending Stocks higher. However, while Stocks were pulled down by QE Tapering fears, Treasuries did not have the same issue. Improving risk appetite generally push yields higher, while a QE Taper which would result in less demand for Treasuries has the same directional impact. With these 2 factors congruent with one another, it is no wonder that 10Y prices managed to trade lower with clear directionality unlike stocks.

Hourly Chart

From a technical perspective, price is currently straddling the descending trendline lower, finding some support around the 123.50 level. Stochastic readings suggest that price is Oversold, but a proper bullish signal is not yet formed. Furthermore, readings have been Oversold for an extended period of time, the latest bullish cycle signal failed to result in any strong corrective movement. The same can be said of the 2nd Sep signal, which warns traders that further confirmation should be sought before assuming that price will be able to trade higher towards 124.0 from here.

Confirmation could come in the form of prices breaking above the descending trendline and preferably break the soft resistance of 123.70. Looking from a pure yield perspective, 10Y’s effective yield based on current price is facing the all important 3% resistance mark, and as such there is a chance that yields may bounce lower, which would translate to a rise in 10Y prices.

Fundamentally, with NFP coming out today, we could see Treasury prices pushing lower even more should the numbers come in much stronger than expected, as that would heighten the fears of Tapering further. This would also mean that the 3% Yield resistance line will be broken, potentially resulting in acceleration for 10Y prices lower faster. The reverse would be true, but traders should not simply expect a long-term bullish reversal as a future Tapering event is already considered dead in the water. Unless Bernanke and his merry band of FOMC voting members come out and denounce a tapering event in either 2013 to 2014, it is unlikely that the fears of QE Tapering will end. A bad NFP print would only delay the inevitable, bringing bond prices lower and yields higher eventually.

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