Friday’s explosive T-Bond rally seriously damaged the bearish case for higher long-term interest rates. Specifically, it opened a path to as low as 1.64% for 30-Year Treasurys currently yielding around 2.82%. This is shown in the chart (see inset), with interest rates (multiplied by ten) displayed on the right-hand axis. Rates vary inversely with bond prices, so a strong rally in T-Bond such as we saw at the end of last week corresponded to a sharp fall in rates. In this case, the explosive, three-point surge in T-Bond futures prices, from 157^16 to 160^16, correlated to a drop in rates from a high of 2.86% to an intraday low of 2.76%.
The chart shows the long-term decline in rates, which stood at 4.5% in early 2011. If TYX were to continue moving within the channel defined by the parallel brown lines, rates could conceivably drop below my 1.64% target. However, it would presumably take a severe global depression to produce such a deflationary result. The target is a Hidden Pivot derived from the ABCD pattern shown. The pattern itself has been validated by the bounce from 2.223% — exactly — to 3.255% between January and June of this year. The 2.223 low is a ‘secondary’ Hidden Pivot support, and the fact that the bounce occurred precisely from it means the pattern is working reliably and predictably.
This means that if 2.223% were to be decisively exceeded to the downside, it would portend further slippage to D=1.639%. This is purely speculative at this point, and the target would be negated if rates pop above 3.976%, the point ‘C’ high of the pattern. Less dramatically, an ‘early warning signal’ indicating higher rates would be flashed if the 3.516% peak achieved in July were to be exceeded. But until such time as that occurs, the long-term trend toward lower rates will remain intact and must be respected.