Has The 10-Year Yield Bottomed?

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First and foremost, I always admit my biased here on the 10-year yield. Since the start of 2015, when I incorporated bond market predictions in every yearly prediction article, I have said the same thing.

The 10-year yield will be in a channel between 1.60%-3%

Even last year when it looked like the long term trend was going to break, I said No way!

“For 2019, I am sticking to my call that the 10-year yield will channel between 1.60% to 3%.  If world trade gets weaker, we could see the 10-year yield with a 1% handle again.”

https://loganmohtashami.com/2018/12/29/2019-economic-housing-predictions/

We have times where the 10-year yield has broken above 3% and below 1.60%

2012:  Spanish Default fear trade sent money into bonds

2016: We had a PMI recession, but the Brexit  event sent money into bonds

2018: Higher oil prices, higher PMI data, and rising inflation expectations pushed the 10-year yield over 3% short term

This is a look at the bond market at the close of August 30t. As you can see below this channel of the 10-year yield between 1.60%-3% has held up. Also, you can see why I had to forecast for inversion at the end of 2017 for 2018 if I genuinely believed that the 10-year yield can’t break away from 3%.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/09/03/treasury-yields-a-long-term-perspective

August 30th Yields

Currently, as I write this the 10-year yield is at 1.87% 

We can see the big sell-off in bonds since the recent lows. This was as of the close yesterday.

From Stock Charts:
https://stockcharts.com/h-sc/ui?s=$UST10Y

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For now, we need to talk about why factors. Recently I wrote an article stating that for the 10-year yield to break under this channel, it will need help.

Can The 10-Year Yield Break Under 1% 

https://loganmohtashami.com/2019/08/02/can-the-10-year-yield-break-under-1/

4 things I talked about that would need to happen

1. Most important is that PMI data needs to go lower.

Since PMI data hadn’t broken under 50 yet we had room to head lower, and we recently had a sub 50 print. After this weak print, the 10-year yield got to as low as 1.43%.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/09/03/ism-manufacturing-index-down-in-august

September PMI total

However, if domestic and global PMI data are bottoming out, this does not bode well for the Recession bears, sub 1% 10-year yield crowd and especially the negative yield crowd.

Excellent chart from Torsten Slok:
Who does good work!

USA 2019 PMI Data

The bears need PMI data to look recessionary not bounce off these levels just below 50 and come back positive.

If you’re looking for below 1.43% 10-year yield, your first hope is for PMI to simply get a lot worse from here. 

2. President’s tweets send’s money into bonds out of stocks 

We should all be mindful by now that China Trade War Tap Dance tweets that escalation tension and tariffs are good for bonds and bad for stocks. However, just recently, the President sounds a bit different.

Personally, for myself, the reason why I thought the inversion headline was bullish for the economy was based on this premise.

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Winter 2020 is coming! Which means the election cycle is starting to kick into gear now. Bad recessionary headlines aren’t good for the President since the Trade Tap Dance War does impact swing states.

Again if you’re a sub 1.43% 10-year yield person, you need more drama from the President’s Twitter account.

Since stocks are almost at all-time highs again, we can be drawn down from here. The President tends to get cocky when the market is at all-time highs. However, his tweets that send stocks lower and money into bonds is going to be less effective in an election year.

3. A real trade war!

From the start of this trade war tap dance, I never believed in the thesis of a real trade war. Everyone is talking about making deals not actually getting into a Tariff for life change behavior trade war which can escalate into real significant economic damage.

However, if you’re a Sub 1.43% 10-year yield person. You need to see the Trade war tariffs increase and stay for some duration. 

2020 might be a bit different because if no deal is done soon, then, China might try to create a lot of market damage right before the election. However, we will cross that bridge next year.

4. Brexit 2.0

This one looked like a big hot mess about to take hold if no deal was announced. However, for now, it seems like we can move this toward next year. Keep an eye on this event.

If you’re a sub 1.43% 10-year yield person, you need drama from Brexit 2.0

Regarding the inversion, we recently had.  At the end of 2017 for my 2018 prediction article, I forecast this

“I am also looking for yields to invert in 2018.”

More critical I said this late in the prediction article

“I believe we will see an inversion in 2018, but it won’t mean a recession soon. It would be the longest time before the first inversion to a recession ever in history if we inverted in 2018.”

https://loganmohtashami.com/2017/12/31/2018-economic-housing-predictions/

I am working off near 10 months from the start of when I believe we inverted the yield curve last year. Until we see enough data to warrant a recession call your inversion bears are still too early. Show some discipline here!

Is The Inversion Calling For A Recession

https://loganmohtashami.com/2019/08/28/is-the-inversion-calling-for-a-recession/

These are some factors I wanted to present here because if Brexit 2.0 is gone, The President is really trying to de-escalate the trade war. Then the only big driver for sub 1.43% yields now is much weaker domestic and Global PMI data. Just remember, this is very important. We already had a PMI recession in 2016, we have previously worked off the excess in the oil rig sector. So, this sub 50 PMI print isn’t going to be as damaging as 2016.

Have a great weekend, everyone!

Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data  daily on his own facebook page https://www.facebook.com/Logan.Mohtashami