Yields begin December cheaper than the five-day, five-week and five-month modified moving averages on all the maturities, which is a clear sign that the risk is toward higher yields into year-end.Yields currently straddle key longer-term levels on the five-year through 30-year, and to begin a renewed trend toward higher yields the five-year needs a weekly close cheaper than 4.532% and the 10-year needs a weekly close cheaper than 4.577%. The 30-year bond stands above its 50-day simple moving average (SMA) at 4.669, which is well above the 200-day SMA at 4.550. Both moving averages are rising in yield, and this configuration favors higher yields. The yield on the 30-year moved above the 200-day SMA at the end of September after being below it since August 2004, and it continues to rise in yield almost daily. The monthly chart profile for 30-year yields favors higher yields, with a close in December cheaper than the five-month modified moving average at 4.598. Will the coupon curve invert? The yields on the two-year, three-year and five-year are essentially the same. I will thus focus on the spread between the 10-year and the five-year as the next key slice of the curve. The 10-year minus five-year spread ended November at +7.5 basis points. I show monthly and quarterly supports at +1.8/+0.7, suggesting that this spread will not invert in December. If there is a weekly close wider than the five-week modified moving average at 11.0, that would be my clue to look for a bearish steepening, with the 10-year yield rising faster than the five-year yield.
Fannie Mae ( FNM) is the cheapest buy-rated financial stock, but it has been facing accounting issues and regulatory scrutiny. Shares are 34.2% undervalued with fair value at $73.03. The weekly chart profile is positive, with the five-week MMA at $47.55 after setting a 52-week low at $41.34 on Sept. 28. My monthly value level is $46.72, and a weekly close above my monthly pivot at $49.31 indicates potential strength to my semiannual risky levels at $52.63 and $56.82. Shares were recently trading at $48.04. Although these two stocks are undervalued, the financial services sector is 5.5% overvalued, so investors could hedge these positions with the Financial Sector SPDR ( XLF), which has a positive weekly chart profile with the five-week MMA at $30.79. A short of the ETF can be considered at my quarterly risky level of $32.81. The risky levels are just above the 52-week high at $32.60 set on Nov 18. Shares were recently trading at $32.15, and my monthly value level is at $29.61.