Bloomberg News

Triangle Points to Decrease in 10-Year Yield: Technical Analysis

June 27, 2012

Treasury 10-year notes, which returned more than twice as much as the overall Treasury market this year, are poised to climb higher after their yields formed a “consolidation triangle” on a chart, according to Citigroup Inc. and Royal Bank of Canada.

A triangle pattern is formed when upper and lower trend lines intersect. The 10-year yield’s trend lines have been converging since the start of June as its daily increases and decreases lessened. The movements, while yields remained near the record low of 1.4387 reached June 1, suggest yield decreases are set to resume, according to technical analysts at the firm.

“The consolidating-yield pattern combined with the direction yields have gone since June, and the inability to break sharply to the upside, is signaling that the falling-yield trend will reestablish itself,” Tom Fitzpatrick, chief technical analyst at Citigroup in New York, said in a telephone interview. Ten-year yields may fall as low as 1.2 percent by the end of the fourth quarter, he said.

The 10-year yield was little changed at 1.63 percent at 11:21 a.m. in New York, according to Bloomberg Bond Trader prices. It is consolidating within a range of 1.55 percent to 1.75 percent established since June 6, according to data compiled by Bloomberg.

The benchmark yield has fallen from a 2012 high of 2.40 percent reached March 20 as the European debt crisis and slowing global growth have fueled investor demand for safety.

‘Fairly Pessimistic’

European leaders will open a two-day summit tomorrow to try to stem the euro bloc’s financial turmoil.

“Yields suggest the market is fairly pessimistic that anything of substance will come from the EU summit, and in that environment yields can rally pretty quickly as things get worse,” said George Davis, chief technical analyst for fixed- income in Toronto at Royal Bank’s RBC Capital Markets unit.

If 10-year yields close below 1.61 percent this week, it will signal an extension to lower yields, Davis said.

“Volatility has fallen off, but the trend has held and the general expectation when you take technicals into account is a break to the downside,” Davis said.

Volatility declined for a seventh straight day yesterday, the longest stretch since March, according to Bank of America Merrill Lynch’s MOVE index. It fell to 71.1 basis points, the lowest level since May 29. The index measures price swings based on options.

Ten-year notes have returned 3.7 percent this year, more than double the 1.8 percent gain in the broader Treasury market, according to Bank of America Merrill Lynch indexes.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

To contact the reporter on this story: Cordell Eddings in New York at Ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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