On the Verge of a Breakout in Long-term Treasury Yields

Long-term Treasury yields are breaking out from a bull flag.

Back on December 15th, NFTRH 840 had this to day about the 30-year Treasury yield “Continuum”:

The 30yr Treasury yield is in a bull flag on its monthly chart. The flag, in its downward bias, represents the disinflationary “Goldilocks” phase that we had anticipated and have been following. If it takes another leg down within its flag-like structure, it could represent “Goldilocks” party extension or increasing deflationary fear. If yields were to pull back far enough (our downside limit is the up-turned “limiters”, the monthly EMAs 100 & 120, currently at 3.3%) it could give at least some credence to the next inflationary operations by Fed and government.

If the flag were to break out to the upside sooner rather than later, a world of pain could visit the incoming president and the asset markets and economy he’ll preside over. The Fed, in my opinion, would be rendered nearly useless as it would not keep cutting rates with the bond market driving them up to new and uncharted territory within the new, post-2022 trend. Rising yields would also complicate (at best) any Fed Treasury bond manipulation, aka Q/E, aka MMT, aka TMM (total market manipulation).

That would leave a debt-spending government and folks, the guy we’ve elected is not a fiscally conservative businessman who will run a sound economy. He is a debt-leverager seeking growth at all costs. Again, fact. Not opinion. Key word: “costs”.

As it stands now, long-term credit is more expensive than it has been since 2011. A disinflationary pullback with weakening economy and markets could instigate the next inflationary action without much fanfare. However, if yields break out here and now, the economy sputters and the yield curve indicates oncoming “bust”, I don’t think the tried and true tools that monetary and fiscal policymakers used over the last 4 decades will work very well, if at all.

So another answer to the question “when will it end?”

How about this answer? It already ended, in 2022 with the vicious break in the gentle disinflationary trend in long-term bond yields. Some market effects (depending on interest rate sensitivity) of that are and have been in play since 2022. But think about all the other effects – which I for one cannot pretend to quantify – that are incubating, waiting, straining, stretching toward their breaking points, toward their turning points. Think about today’s happy macro picture (on the surface) – and folks, they sure do have this pig painted with bright red lipstick – as a dead man walking.

With just a few days left in the month and in the year, the flag is postured to be broken to the upside. The Continuum stopped continuing in 2022 and is hinting to continue upward on that trend break.

If the month closes that way and if this is not some sort of low volume Santa week misdirection shenanigans, trouble will be indicated. Or as the man said in the Bad Chicken Episode “that’s not gonna be good for anybody”.

On the plus side, I am distrustful of most of the market signaling during Santa. But if this is actually the next leg up in the new trend in yields (we should have a conclusive answer in January), a lot of the investing world is going to be caught off sides, as will the Fed, which has only just started to baby-step away from the dovish stance that it so kindly supported the Biden administration with in the run up to the election.

Ever since the Continuum rammed through the EMA limiters for the first time in decades back in 2022 our job has been to interpret the meaning and implications of this epic change in macro signaling. A trend is obviously gone, busted, obliterated actually. That trend supported all sorts or orthodoxy and automatic thinking by traders, investors and financial advisers.

You can see in commercials for every damn financial services institution barking away for your funds, with promises of fiduciary responsibility as they do the dirty work while you and the Mrs. pursue your dreams of golf, travel, fine dining and exotic getaways. Let them handle it because they’ve got a four decade trend of benevolent bond market signaling and hence, benevolent policymaking at their backs. Except no, they don’t.

The Continuum’s ruptured trend in 2022 signaled that something new is in play for the coming years, possibly decades, and while I cannot define exactly what it will be, I can tell you what it will not be. It will not be what most people have been trained for over the last 40 years.* That’s pretty profound, I’d say.

* The training has been to always expect the markets to rebound from every bear phase or crash to stunning new heights, because they are trained to expect policy that was, always will be. This has been the era of rich get richer, middle get squeezed and poor get poorer. So someday, when America is a socialist country you can lay the blame at the feet of the ultra, mega, exponentially rich and the rig job in monetary (Fed) and fiscal (Government) policy that created the vast gulf between them and the majority of the population.

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