Over the past year and a half, the U.S. 10-year Treasury Note has been under tremendous selling pressure and that has caused the rate to rise to its highest level since June ’14.
We see on the chart below that the futures price for 10-year notes has dropped to its lowest level since mid-2011 and the momentum seems to be to the downside still. We also see that the weekly stochastic readings and the 10-week RSI are both in oversold territory for the first time in over a year.
When you look at this drop in the price of bonds, it looks very similar to the one from mid-2012 through the end of ’13. They both start in June and last approximately a year and a half- that is assuming that we are close to the bottom at this point in this decline. There was a bounce from September ’13 through November ’13, just like there was a bounce from March ’17 through August ’17. These bounces likely led investors to believe that the decline was over, but obviously that wasn’t the case in either instance.
Looking more closely at the 10-week RSI, we see that over the last 10 years there have only been five instances where the futures have reached oversold territory. With the exceptions of prolonged periods of oversold readings in ’13 and ’16, the notes usually bounced back with some sort of rally. It is also worth noting that there is some seasonality to the chart with the notes rallying in the first part of the year on several occasions. We see it in ’11, ’14, ’16, and ’17.
Turning our attention to the sentiment toward the 10-year notes, the Commitment of Traders report shows that large speculators moved to a net-bearish position in mid-December after being net bullish from April to December. The group was net bearish in the first four months of ’17.
The overall sentiment reading from SentimenTrader.com shows a slight reversal in the most recent week, but the reading on January 9 was the lowest since last March. The reading that week was also one of the lowest readings of the past three years with the exception of a prolonged stretch of overly pessimistic readings from November ’16 through March ’17.
The relationship between the dollar and the 10-year note is a bit perplexing. Normally when interest rates rise in one country against the rates of other countries, the currency of the country with interest rates rising usually rises as well. The reason for this is the debt instruments become more attractive to foreign investors and that creates demand for the underlying currency. But that is definitely not happening with dollar.
There could be some support coming for the dollar index in the 89 area. This area served as resistance back ’09 and ’10 and could now act as support and halts the current decline in the dollar.
The bottom line is that it seems like the drop in bonds is close to being over. It seems like there is a much greater chance of a bounce than more selling. A bounce might not start this week or even in the next month, but the reward for buying bonds at this point sure seems greater than the risk.