Technicals Sunday: beware the false breakout

Mike Zaccardi, CFA, CMT

The 10-year yield gave us all a massive fake out last week – jumping to near 1.00% after being confined to a range from 55 basis points (bps), or 0.55%, to 80bps from early April through early June. Alas, the jump toward the key psychological figure was short-lived as investors were quite scarred from Thursday’s 5% decline in US stocks.

It’s called the ‘flight to quality’ when investors shun risky equities to buy-up safe Treasury notes. Keep in mind the bond price and yields move opposite – like a seesaw.. as bond prices go up (when they see buying pressure), yields fall.

The benchmark 10-year interest rate dropped from 95bps to to just 65bps by Thursday’s market close. You may ask why this matters for Utilities?

Utility firms depend on debt-financing since they have stable businesses and big fixed assets. So lower interest rates are a great development for those firms who need to refinance. Much like exchanging a home loan for the latest market rate.

A year ago, the 10-year yield was near 2.15%, believe it or not. Traders tend to get lost in the moment and forget about just how far the bond markets have come. And it seems like ages ago when the 10-year was in the stratosphere at 3.2% in September 2018.

The old guys will laugh at me for that last sentence. 3.2% does not seem high when looking at the long-term chart – back in September 1981 the 10-year interest rate spiked to near 16%! Imagine if the market one day hit those astronomical levels. It seems like it just could never happen. But always remember that financial markets are almost designed to fool most of the people most of the time. They do the impossible. Whether that means negative rates or sky-high interest rates, I do not know. Nobody does. Keep an open mind and beware the false breakout!

Follow me on Twitter @MikeZaccardi

Chart used with permission from TradingView.com