Quick Recap
Bond rates have been rallying for the best part of 30 years in one of the most important secular market trends in modern finance. The fall in bonds which has accompanied the collapse in official cash rates around the world has been a big factor in supporting the stock market rally.
That's especially the case at current elevated levels of US prices.
But all that could be about to change as US 10's are poised to break higher.
What You Need To Know
I have a really strong belief that Bonds, absent the 1987 crash are responsible for most of the market funks, the real ones, we’ve had over most of the past 30 years. Whether it is the S&L crisis of the early 1990's, the bond funk of 1994, the LTCM collapse, Asian crisis, not the Nasdaq bubble, but certainly the GFC have all had a bit of bond related turmoil as the butterfly wings which kicked them off.
So, with the Fed signaling that it is time to start raising rates again. And after US 2's and 10's made all-time lows in recent months. And particularly because almost the only reason everyone isn't screaming stocks are hideously overvalued (the Fed made this exact point recently) is because bonds are so low we have to watch what's happen in that market very closely.
So I wanted to highlight my colleague Jonathan Garber, from Business Insider US's story on a UBS note which says the bond market is “sitting on the edge”. For me this is the story of the day.
That’s because a move in the level of bonds rates, if they break, will change the discount rate for stocks, support the US dollar even further and potentially change the paradigm that global markets have been trading on for the past year or so.
Instinctively when I see a chart like the 10 year US Treasury above (from my Reuters Eikon terminal) I think the downward sloping trendline must be respected unless or until it breaks.
That's the McKenna Mantra after all.
Likewise though the force is strong in the short term uptrend that the 10's have been in since the lows back in the immediate post-Brexit period in late June.
So we have a market that technically is poised for a big break - one way or the other.
The non-farm's catalyst
Coincidently as the market winds itself toward a technical resolution of this wedge the 10's find themselves in we have the release of US non-farm payrolls looming large on the horizon. After ADP payrolls data last night printed 177,000 it seems likely the markets guesstimate of 180,000 could be somewhere near the money. It’s certainly enough to break traders from their summer slumber. UBS says the level to watch in US 10s is 1.63%. Now we just wait for non-farms tomorrow night.
After ADP payrolls data last night printed 177,000 it seems likely the markets guesstimate of 180,000 could be somewhere near the money. It’s certainly enough to break traders from their summer slumber. UBS says the level to watch in US 10s is 1.63%. Now we just wait for non-farms tomorrow night.
That in itself would be a large enough increase to materially increase the probability of a September rate rise and so drives US 10's up and through resistance at 1.63%.
Now employment data can be volatile but in many ways a break higher, or lower, in the 10's is in many ways more important than what the market things the Fed may, or may not do.
Most retail traders don't trade interest rate or bond markets. But they remain a critical driver overall. That's because by impacting the discount rate for stocks and supporting the US dollar a break higher in rates could usher in a paradigm shift for markets tomorrow night.
Have a great day's trading
Greg McKenna
Chief Market Strategist AxiTrader