Last week, yields on the 10-year U.S. Treasury Note reached the 2.98 percent level. As we all know, yields have soared higher by 137 basis points since April 2013, when the yield on the 10-year U.S. Treasury Note was as low as 1.61 percent. The recent surge in bond yields have certainly caused stock corrections in the home-builders, mortgage/real estate REITs, and the highly leveraged utility sectors. The Federal Reserve is buying $85 billion dollars a month worth of U.S. Treasuries and mortgage backed securities (MBS) at this time. So far, the case can be made that yields are artificially being held down.
Now that everyone knows a Federal Reserve tapering of its current QE-3 program (central bank bond buying) is coming, how much can bond yields on the 10-year U.S. Treasury Note actually fall? Currently, the daily chart of the 10-year U.S. bond yield ($TNX) is showing very good support around the 2.63 percent level. There is also more chart support around the 2.45 percent level. So either way, bond yields are not going to decline all that much unless there a major economic disaster takes place. The odds of an economic disaster occurring in 2013 is very unlikely, however 2014 is another story.
Higher bond yields are telling us two things:
First, higher bond yields are telling us that the Federal Reserve must begin to cut back on their current $85 billion a month QE-3 program. If they do not, there could be major problems or repercussions in the future. The bond market is smarter than the stock market since the world is built on debt. So when the bond market talks, traders and investors better listen.
Second, easy money has almost always led to an economic boom; but higher rates or a tapering could certainly cause the economy to slow down. Many economists will argue that currently this economic recovery has been one of the weakest on record considering the central bank has pumped about $4 trillion into the system. The one obvious positive effect from all of the easy central bank money has been the new all time highs in the stock market. Either way, the chart of the bond yields is starting to certainly paint a different picture for the future. The next FOMC meeting will take place next week, this is when QE-3 tapering could be announced.