U.S. 10-year Treasury yields, an important interest rate benchmark for the U.S. economy, have been testing a key technical threshold this week. Chart watchers say a breakout from a long-term pattern could set the stage for a much bigger move higher in borrowing costs.
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The 10-year yield touched 4.6358% on Tuesday, its highest level since May 21, according to data supplied by LSEG, before easing back to around 4.59%. The pullback came in the wake of reassuring data that showed inflation moderating.
However, its recent moves have left the yield hovering just above the top of what technical analysts call a symmetrical triangle, a chart pattern that forms when a market's swings narrow over time, squeezing prices into an increasingly tight range before a breakout in one direction or the other. This pattern has been developing for some time and may soon approach a critical point.
The upper boundary of that triangle currently sits near 4.56%, and while yields are probing above it, the breakout is not yet confirmed. The move could still fail if yields retreat quickly.
What may intrigue market participants more is a separate signal pointing to unusually calm trading conditions. A measure known as Bollinger BandWidth, which tracks how compressed or stretched a market's volatility has become, shows monthly readings hit their lowest level since 1989 at the end of May. Such quiet spells do not reveal which way a market will break, but they have often preceded sharp moves once they end.
History offers examples: similar volatility troughs in 2007, 1991 and 1989 were each followed by sizable yield declines within a few months.
For now, a quick retreat back below 4.52% and then 4.44% would raise doubts about a breakout to higher yields. But as long as yields hold above 4.29% or so, the bullish case stays intact, with a break below that level opening the door to 4.04%-3.92%. On the upside, clearing 4.6358% could pave the way toward 4.687%, then 4.81% and even 5%.
What the chart shows:
(Daily markets commentary from Reuters analysts on the signals financial charts are sending - and what they might mean.)
