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John Kozey
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John Kozey is Director of Research at KnowVera, LLC, where he oversees research and trading of algorithmic trading strategies. Prior to that, as a Senior Analyst at Thomson Reuters, he produced reports blending fundamental and technical analysis for actionable ideas. John was also Equity... More
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  • 1% 10-Year Treasury Yield Still Possible 0 comments
    Sep 12, 2012 2:23 PM | about stocks: DLBL, DLBS, DSTJ, DSXJ, IEF, FSA, FSE

    One Percent U.S. Treasury Yield Still a Possibility

    Back in mid-May we discussed the chances for yields on the 10-year U.S. Treasury to move down to under 1 percent (link.reuters.com/nyc62t and for the video/text click down to May 15, 2012: link.reuters.com/mev42t). We continue to believe U.S. Treasury yields will move down, now that they have corrected from a steep drop. Here are three reasons why this may happen.

    Reason 1 - "Measured Move"

    The move down in yield from 2.8% in August 2011 came on the heels of then-ECB president Jean-Claude Trichet's comments that the Euro-crisis could spread beyond the periphery nations of the European Union (Chart 1). The U.S. 10-year yield found a trading range roughly between a floor of 1.8% and a ceiling of 2.4%. The 1% drop should measure how far the ensuing breakdown from the 1.8% zone should go, which is actually down below 1.0%. Things seldom work out perfectly, so let's call it at least a 1.0% objective.

    Chart 1.

    Reason 2 - the 40-week (200-day) average has been tested

    Chart 2 shows that Treasury yields moved up to their 40-week moving average, a proxy for the technically important 200-day moving average, and have fallen back so far. At this point, yields have tested their longer-term moving average and show a downward bias for now.

    Chart 2.

    Reason 3 - Fibonacci retracements

    The daily data from Chart 3 shows the Fibonacci retracement of the drop that began in March. Note that yields retraced less that 50% of the move lower, which again seems to favor lower yields, rather than higher yields, although not so weak as to have failed to penetrate the lower 38% retracement level.

    Chart 3

    Counter-argument

    One reason this may not hold technically, is that yields may be in a bottoming process. Chart 4 does show that the 40-week moving average is close to the current rate, so a trend change is not inconceivable. One example of where this did not work was earlier in 2012, when it moved above the 40-week average for a bit before falling back.

    Chart 4

    In summary, a lower 10-year U.S. Treasury yield appears more likely moving lower, or best-case, sideways in the future. It is hard to find reasons today that would justify a "melting up" in yield. With so many sovereign governments and central banks continuing to intervene in markets, we do not see a potential for higher yields.

    Link to original article on Alpha-Now.com:

    http://link.reuters.com/puj62t

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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