Model Signal Alert

August 22, 2023

The relentless selling of bonds continues. Real 10-year treasuries (TIPS) touched 2%, which was last seen in 2007 and 2009 (see chart below with orange being the break-even spread).

Meanwhile, US 10yr nominal yields are breaking out to new highs. I get tons of questions as to where it will stop. I don’t know. The previous cycle high in 2007 was at 5.25%, which would be “technically” the next target.

The incoherent picture is, however, the level of 10-year yields and the slope of the 2-10s curve. Looking at a simple regression from data from 1994 (10-year yield x-axis, 2-10s y-axis), you can see how flat we are compared to the level of rates. Needless to say that all other occurrences in that corner (red being the current reading) was also coming from observations from this year.

In terms of bond momentum (ZN below, US 10-year), the model is still firmly short. As highlighted last week, we had a reversal window which has now passed. The last technically positive indication near-term is the 9-count on the TD, which is a secondary reversal indicator I use.

Now, let’s see what has been flashing up as of close last night. The reversal model warned us nicely about a bounce in risk which is now in play.