The yield on the U.S. five-year note may be setting up to rise to a more than four-month high as it completes a complex reverse head-and-shoulders pattern, Bank of America Merrill Lynch said, citing technical analysis.
A break in the yield above 93 basis points, or 0.93 percentage point, would confirm the pattern and indicate the yield may rise to as much as 1.22 percent, matching highs last seen in October, MacNeil Curry, head of foreign-exchange and interest-rates technical strategy at the Bank of America Corp. unit in New York, said in a telephone interview. The initial target in the move is 1.02 percent, last touched in December, before moving higher.
“We need to get a tick above 93 basis points to confirm,” Curry said. “Equity markets breaking out to new highs would be a bit of a catalyst, a continued pickup in risk asset outperformance.”
The yield on the five-year note gained two basis points to 0.90 percent at 2:22 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the security due in February 2017 fell 1/32, or 31 cents per $1,000 face amount, to 99 28 3/4. According to Curry, a decrease below 77 basis points would invalidate the formation.
A reverse head-and-shoulder pattern occurs when movements in a security form three bottoms, the middle of which is the deepest. The five-year note yield’s formation has two dips for each shoulder.
“It isn’t just one shoulder on one side,” Curry said. “In theory, it could actually be a stronger sign -- it takes longer to complete and could actually be more powerful.”
In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity or index.
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