Big Reversal Pattern In Yields May Predict Calm Returning To Rates Markets

By Bryan Rich

May 18, 5:00 pm EST

We’ve talked this week about the pressure that rising U.S. market interest rates are putting on emerging markets.

The fear surrounding the big 3% marker for U.S. 10-year yields is that 3% may quickly become 4%. And a 4% yield, much less a quick adjustment in this key benchmark interest rate, would cause some problems.

Not only does it create capital flight out of areas of the world where rates are low, and monetary policy is heading the opposite direction of the Fed, but a quick move to a 4% yield on the 10-year would certainly cloud the U.S. economic growth picture, as higher mortgage and consumer borrowing rates would start chipping away at economic activity.

With that said, we may have a reprieve with the action today in the bond market.

As we head into the weekend, today we get a softening in the rates market. And that came with a big technical reversal pattern (an outside day).

You can see in the chart above, the engulfing range of the day. This technical phenomenon, when closing near the lows, is a very good predictor of tops and bottoms in markets, especially with long sustained trends.

I suspect we may have seen some global central bank buyers of our Treasurys today (which puts downward pressure on yields) to take a bite out of the momentum. We will see if this quiets the rate market next week, for a drift back down to 3%. That would calm some of the nerves in global currencies, and global markets in general.

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