For the last few weeks, I have been "Preaching" that the market price action and background dynamics that were so similar over the last year to that seen in 2006-2007 were breaking down.
In particular in that respect I focused on the 2-year yield. (This morning I banged the drum a little about TY1 and the 10-year yield in the note titled Wave The Bond Market Goodbye
Now it is time to go back to the 2-year yield and focus on what is next.
The chart below shows that the initial target of 4.27-4.28% has been reached and we have paused somewhat.
Above there the next levels in focus are 4.45% (55-week MA and 61.8% retracement level and 4.65% to 4.68% (Trend line resistance and the 76.4% pullback level)
I think reaching the first level (4.45%) will be fairly easy and potentially fairly quick and a move to the 2nd level at 4.65% to 4.68% is also a real danger
What are the catalysts?
We had already seen the underlying picture change and that gave the view that the 2-year yield would move higher (price action and data) now we have another catalyst.
Whether this is a Trump victory or more likely a "Red Sweep" the die seems cast for higher yields and recent charts on long-term yields and 2's versus belly and long end curves support this.
It is unlikely that 2's lead the way here given they are very much driven by Fed policy and expectations.
The Fed will almost certainly move tomorrow for a number of reasons and cut rates 25 bp's
-They have heavily guided that move
- Recent inflation and employment data did not derail that guidance
- Vice Chair Timiraos has not guided us away from that outcome
- To not cut rates tomorrow in light of these facts would look "horribly political"
So, it looks to be a done deal......BUT. The World has literally changed overnight with a very real danger of aggressive fiscal and regulatory easing feeding into the US economy - and quickly if the Red Wave is confirmed.
As a consequence, I expect the Fed, tomorrow, to pour a very heavy dose of cold water on the idea of a December cut and be very non-committal about what is next. Clearly, they are not going to tighten anytime soon but the easing path is now much more up in the air.
That outcome, if we see it, will set in motion the next move higher in yields with 2's also joining the party (maybe consolidating the curve steepening near term) and that combined with a "confirmed red sweep" is the likely catalyst for another push higher in yields and a move on 2's to that upper 4.65% to 4.68% range before the end of the year looks extremely possible.
