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10 & 30 Year Returns USA – The Technical Outlook for 2021 – Columns

Magic 1% mark

“Yesterday we were still facing the abyss. Today we are already a huge step further. ”The well-known quote from Erich Kästner fits the situation on the international bond markets like no other. In the penultimate annual outlook we already spoke of “NN – new normal or again negative” with regard to the 10-year yield in Germany and also expected the 2019 low of -0.74% to endure 12 months ago. But in the course of the market turmoil in February / March, the yield even fell to a new all-time low of -0.91%. Developments on the other side of the Atlantic were even more dramatic. The old lows of 10-year US yields from 2012 and 2016 were literally pulverized at 1.38% and 1.32%, respectively. With an extremely large high-low range, the US yield fell from 1.28% to an all-time low of 0.32% in March – investors are still inclined to say positive. In general, the spring of 2020 produced some notable candles that will play a key role in our pension outlook! Until we come to that, please take – based on Konrad Adenauer – the Zincharts as they are, because there are no others anyway!

10-year US return (annually)

Chart 10-year US return

Source: Refinitiv, tradesignal²

5-year chart 10-year returns USA

Chart 10-year US return

Source: Refinitiv, tradesignal²

Sentiment: Another one!

We would like to start with a warning finger: While the bull market in bonds of the past 40 years is undoubtedly one of the most underestimated trends in the financial markets, there is now a clear change in sentiment among investors. “Lower for longer”, i.e. the continuation of the record low or even record negative interest rates, has arrived on the market in terms of sentiment and has been accepted by the vast majority of investors. Viewed through the lens of behavioral finance, this is the breeding ground that brings even the longest, most stable trends to break. Whether already in 2021 – we don’t know! But the one-sided sentiment provides an indication of what has meanwhile become the “mainstream” opinion. Where the “sore point” of the market is and from which direction surprises could come in 2021. In order to be prepared for this, we will give you important trigger brands with you on the way. Their decisive added value lies in being prepared. After all, unexpected events are regularly accompanied by position imbalances. That is why such surprise brands often mark levels at which the market is permanently in motion.

10-year US return (annually)

Chart 10-year US return

Source: Refinitiv, tradesignal²

Triple bottoms never hold

After this excursion into sentiment analysis, we would also like to start our annual outlook on the pension side with the analysis of a high time level. True to the motto of the US philosopher Ralph Waldo Emerson: “The years teach a lot that the days never know”, we are the first to put the long-term 6-month chart of 10-year US returns to the test. First of all, the half-year chart documents the general bearish trend in yields since 1981 (as of H1 2021 at 2.93%). In the past decade, a broad trading range between a good 3% on the top and 1.43% / 1.38% / 1.32% on the bottom had established itself. The listed lows of 2019, 2012 and 2016 also offered the chance of developing a triple bottom. The already mentioned pulverization of this holding zone in the 1st quarter of 2020 is an impressive reminder of the old trading adage “triple bottoms never hold!” As a first key message we would like to state that the attempt to bottom out in recent years has been erased. The trading range for the first half of 2020 is also impressive: it went from 1.95% to a historic low of 0.32% in record time (see chart).

10-year US return (semi-annually)

Chart 10-year US return

Source: Refinitiv, tradesignal²

“Inside candle” provides information about the 1% mark

The wide range of fluctuation in the first six months of the year should therefore set the guidelines for future interest rate developments. At least in the second half of 2020, a classic inner staff was trained. At the same time, the last two 6-month candles each have distinctive fuses. This pattern of behavior suggests that the 0.32% level marks an important cyclical low. In addition to the large guard rails already discussed, investors can use the latest “inside candle” as a short-term clock. The high of the 2nd half of 2020 at 0.97% belongs in the logbook of every investor, because a spurt above this level would dissolve the described inner bar upwards. After the magical 1% mark, and much more later, the lows of the last eight years at around 1.40% form an extremely thick technical chart. As you are used to from us, in the next step we break down the time level on a monthly basis. The shorter deadline provides impressive evidence of the relevance of the key brand at just under 1%. After all, the US 10-year yield made important highs here in June and November (see chart).

10 Year Return USA (Monthly)

Chart 10-year US return

Source: Refinitiv, tradesignal²

Cross resistance: 1% – second

However, both monthly candles have distinctive wicks, so that market participants show this key brand the necessary respect. Together with a parallel to the base downtrend of the last 40 years (current at 0.94%) – constructed over the low from 2012 – there is even massive cross-resistance at this level. But that’s not all: the resulting accumulation zone is rounded off by the 38.2% fibonacci retracement of the last yield slide from November 2019 to March 2020 (0.95%). We still have one last argument in the quiver: Although the development of the higher time level already suggests, there is also a real series of inner bars on a monthly basis. The entire price activity of the 10-year US yield of the last eight months took place within the dynamic candle from March. Accordingly, the consequence of “inside months” would be resolved upwards if the rate rose above the 0.97% mark. Investors therefore cannot overestimate the importance of the hurdles listed! Removing the 1% mark would mean setting an unexpected course away from the “mainstream”.

10 Year Return USA (Monthly)

Chart 10-year US return

Source: Refinitiv, tradesignal²

The next accumulation zone

Due to the potential for surprise, the “market” on this demarcation line could therefore start to move. If the breakout is successful, the above-mentioned Lows at 1.32% and 1.38% back on the agenda. Incidentally, the next accumulation zone arises in this haze: the lows already mentioned are joined by another Fibonacci level (1.34%). In the middle of the year, the actual parallel to the base bear trend since 1981 and an old trend line since 2007 intersect here. If there has ever been a textbook accumulation zone, then this is it! In order to underpin the “make or break” character of the upstream 1% mark one last time, we analyze the daily chart of the 10-year US yield in the annual outlook to fine-tune the possible interest rate development in the new year, contrary to our other, long-term practices. Following the roller coaster ride in February / March, the price development has since offered the possibility of bottoming out (see chart). The neckline of the lower reversal is defined by the highs at 0.96% / 0.97%. In other words: Almost 1% – for the umpteenth time!

10-year US return (Daily)

Chart 10-year US return

Source: Refinitiv, tradesignal²

1% mark: soil formation on a daily basis

A successful spurt above the key size of just under 1% would therefore also result in a lower reversal in the daily chart. The follow-up potential from the height of the trend reversal can be estimated at around 45 basis points if successful. This results in a price target exactly in the area of ​​the above-described accumulation zone at around 1.40%. The combination of different time levels thus underpins both the decisive clock at just under 1% and the accumulation start target at 1.40%. The moving averages are currently contributing an important detail in terms of a possible tide turn. On the one hand, the 10-year US yield last jumped above the 200-day line again for the first time since the end of 2018 (currently at 0.75%). On the other hand, there was also a positive pattern between the long-term smoothing already mentioned and the shorter-term counterpart of the last 50 days (current at 0.80%). As a result, a so-called “golden cross” is created. On the other hand, in the event of a rebreak of the two average lines, failure at the 1% key mark is evident. This would put the bottoming out on the back burner and pave the way for a “lower for longer” at least in 2021.

10-year US return (Daily)

Chart 10-year US return

Source: Refinitiv, tradesignal²

Early warning system: 30-year return

The moving averages also play a “major role” from a risk perspective. This is the ideal transition to our last US bond chart: The course of the 30-year US yield can be used as a possible early warning system. E. Provide important guidance. Here too, a whole series of “inside months” has been available since March. The critical size for their upward reversal is defined by the highs of June / November at 1.76% and 1.77% respectively (see chart). On the one hand, these key figures harmonize perfectly with the parallels to the base downtrend since 2011 (currently at 1.73%) and on the other hand with the 38.2% retracement of the last interest rate slide since the end of 2018 (also 1.76%). The corresponding downward trend established in November 2018 will be the icing on the cake at the beginning of the year, also at 1.78%. A jump over this bundle of barriers, combined with a return to the aforementioned bearish trend, would complete a bottom formation and lay the basis for an interest rate hike in the direction of the next accumulation zone between 2.08% and 2.22%. Another Fibonacci retracement (2.08%) coincides with the lows of 2016 (2.09%) and 2015 (2.22%) (continued tomorrow).

30 Year Return USA (Monthly)

Chart 30-year US return

Source: Refinitiv, tradesignal²

5-year chart 30-year returns USA

Chart 30-year US return

Source: Refinitiv, tradesignal²

The full annual outlook is available in the December issue of our customer magazine “Marktbeobachtung”. Just take a look at our homepage and find out more on our Market watch page.

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