Stock Market Crash! Blog

How High Can Treasury Yields Go?

In the spirit of the last post, I'd like to bring attention to another bearish chart pattern, this time in interest rates, more specifically the 30-year US Treasury Bond yield. This pattern is called a head and shoulders bottom reversal, which you can learn more about at StockCharts.Com. This pattern provides a minimum target of 5.5%, from the current 5.1%. The market has already broken out of the pattern and will likely continue rising.



Our measurement technique is derived from adding the vertical distance of the widest point of the pattern to the price where the market breaks above the neckline resistance level.

Its very possible for the yield to hit 5.5% and enter a sideways consolidation pattern before resuming its upward trend.

Such a rise in yields would entail a corresponding collapse of bond prices, as yields and bonds are inversely correlated. If yields hit 5.5%, 30-year Treasury Bonds will drop to a price of 100, from the current price of 107. See the 30-year Treasury Bond chart. Obviously, bonds aren't the best investment to be holding at the moment.

Some reasons for rising rates are inflation fears stemming from strong global GDP and employment growth, record borrowing by the US Government and rates' reversion to their mean after spending years at historically low levels.

Though we use 30-year Treasury Bonds as our example, the analysis applies to all interest rates over 5 year maturities, including mortgage rates. The accelerating rise of mortgage rates will only to serve to hasten the unwinding of the once white-hot housing market. So far, mortgage rates have only gently meandered downward, allowing housing to cool slowly. Could the coming development cause housing to implode? I think it will, but only in the overvalued East and West Coast markets which are awash in speculative activity.

Between the rise in rates and the cooling of the housing market (which will dampen consumer spending), you can expect economic growth to be stifled. My hope is that this scenario doesn't entail a recession, which is may certainly be in the cards.

The good news is that you can profit handsomely from the coming rise in rates, so stay tuned for the next post ;)

Click here to check the updated 30-year Treasury Bond yield chart at StockCharts.com