30-year downtrend in interest rates may be over

This chart warns that the 30-year downtrend in interest rates may be over

Published: Feb 15, 2018 4:55 p.m.

Benchmark 10-year Treasury yield broke above a 30-year downtrend line. Here’s what experts are saying

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You don’t need to be a technical analyst to get anxious when you see this chart—especially when you consider that the only trend in longer-term interest rates that an entire generation of people has ever known may have finally ended.

FactSet, MarketWatch

The yield on the benchmark 10-year Treasury note TMUBMUSD10Y, +0.00%  has an effect on all parts of the economy, as it influences everything from borrowing costs for the smallest and biggest companies, to rates for fixed and adjustable mortgages, car loans and credit cards. For three decades, one thing everyone could count on was if you were patient enough, rates would eventually be lower.

Not anymore.

The yield broke above the downtrend line last week, and extended gains to close at 2.91% on Feb. 14, up from 2.40% at the end of 2017, according to U.S. Treasury data. The monthly downtrend line currently extends to about to between 2.60% to 2.65%.

Don’t miss10-year Treasury yield notches biggest weekly climb since Trump’s election.

See alsoWhat the Federal Reserve rate hike means for your credit-card debt and savings.

The scariest thing for investors and consumers is often the unknown. But while some market pundits acknowledge that a “new norm” for rates is in the works, it’s not that rates are expected to spike back up to where they were in the 1980s. Besides, some people, such as those living off a fixed income, should actually welcome the new trend.

Still, it may not be a coincidence that the Dow Jones Industrial Average DJIA, +0.08% plunged 1,033 points on last Thursday, the second-biggest point drop ever, just three days after it suffered a record 1,175-point loss, to close 10% below its Jan. 26 peak.

FactSet, MarketWatch

Since then, however, the Dow has rallied 1,340 points through Thursday, to retrace nearly half its selloff.

Here’s what some experts are saying about the 10-year yield breakout:

Arbeter Investments LLC president Mark Arbeter, CMT: From a “very long-term perspective, yields appear to be tracing out a “massive bottom.” If the 10-year yield gets above the 2013 high of 3.04%, a bullish long-term “double bottom” reversal pattern would be completed, opening the door for an eventual rise toward the 4.75% area.

A double bottom, according to the CMT Association, the keepers of the Chartered Market Technician certification, is this: “The price forms two distinct lows at roughly the same price level. For a more significant reversal, look for a longer period of time between the two lows.”

The two bottoms Arbeter refers to are the 2012 monthly low of 1.47% and the 2016 low of 1.45%.

Arbeter pointed out that during prior stock market peaks, such as the ones in 1987, 1990, 2000 and 2007, rates were much higher. The increased volatility in rates with the yield under 3% suggests a “long-term bottom” in yields.

Arbeter said in a recent note to clients that while the recent stock market volatility may have been a warning of a bear market down the road, “I do not think that we have seen the highs for this bull market yet.”

Frank Fantozzi, president and founder of Planned Financial Services: The real question is, “what will be the new norm?” He thinks yields will trend higher through 2019, but not that much higher.

“A new norm though around 4% would not be unrealistic in time,” Fantozzi said. “A 4% rate will not be a headwind to the economy if it is the new norm.”

That level of yields might attract some additional money to the bond market, which would lead to a bumpier ride for stocks, but not anything that should cause investors to get out of the market. “The norm was not 16 months without a 5% pullback,” Fantozzi said.

Brad Pettiford, spokesman for United Wholesale Mortgage: “It’s a bit disconcerting because we just broke through the 30-year trend line, but we’re not concerned with rates skyrocketing.”

He said yields had averaged generally between 5% to 7% before the mortgage crisis of 2008 to 2009, after which rates dropped, so a return to near those levels shouldn’t be cause for too much concern. “The mortgage industry has been operating in a low-rate environment for a long time, and even if rates aren’t going to be low again this year, it wouldn’t be too worrisome to see rates around 5% or 6%, because that’s average,” Pettiford said.

Frank Cappelleri, CFA, CMT, executive director of institutional equities at Instinet LLC: In the medium term, he believes the bullish “inverted head and shoulders” reversal pattern that has formed over the last few years suggests a return toward the peaks seen in 2008 through 2010. Read more about inverted head-and-shoulders patterns.

FactSet, MarketWatch

Over the “very long term,” while the apparent breakout is significant, it’s not as scary as some may believe.

“It certainly could be different this time, but it would be surprising if the yield continues along at this torrid pace,” Cappelleri said. “All of this could very well be the beginning stages of getting back to a more ‘normalized’ rate environment.”


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