The sideways moves in financial markets these past few months has provided a respite from the unprecedented moves experienced in the first half of this year. A sideways move, also known as a correction, can confound market participants particularly traders and speculators who are generally trend followers.
Bond watchers should know the trend by now as bellwether interest rates on the ten-year U.S. Treasury note climbed from a low of 0.31% on March 9th, 2020 (prices/yields per Bloomberg) to 3.50% on June 14th, 2022. Those yields equate to a price of 111-19 in 2020 on the ten-year 1.50% U.S. treasury note due February 15, 2030, and 86-14 in June, for a loss of over 25 points.
The summer sideways action saw bond prices rally with the bellwether treasury note trading at 93-03 on August 2nd or 2.50% for a nice, quick one hundred basis point correction over about six weeks for a six-plus point gain…but now sideways is over. This week the yield on the ten-year note is now back over 3% (3.11% as of August 25th).
The trading action of the bellwether ten-year note is instructive because this is how corrections work. Yes, the 3.50% level in June was a new high for the cycle but it also a new high dating back 11 years! The ensuing correction was swift (so far, a matter of weeks), but it does not change the trend.
The current question for bonds is whether the correction (sideways action) continues for a few more months or whether bonds hit new higher interest rates (new lower prices) in the coming weeks.
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