Mike Larson: They say a picture is worth a thousand words, and this week, you’re going to get 2,000 words that practically prove interest rates will rise.
Below are two charts that tie together everything I’ve been saying about Federal Reserve policy, historical interest-rate patterns, fundamental truths about the interest-rate markets and more.
First up is a weekly chart of two-year Treasury yields — one that goes back to the start of the century. Those yields are among the most sensitive to changes in Fed monetary policy. That’s because the underlying securities’ maturity is closer to the Fed’s overnight rate than, say, 30-year bonds.
A couple of things jump off the page right from the start. The first is that two-year yields have breached the 100-week moving average to the upside. Second, the moving average has turned up for the first time since 2004 in the past couple of months.
But this is not a short-term trading signal, the kind that sets off triggers all the time and ultimately proves meaningless in the grand scheme of things. Instead, it’s the kind of longer-term technical signal that points to higher short-term yields. And not just for a brief period of time, but for a period ofyears.
Take the last signal in 2004. Two-year note yields surged from around 1.75 percent to more than 5 percent, an increase of 325 basis points. What’s more, the advance lasted a full three years.
Second, below is a chart of five-year Treasury yields that represents the “belly” of the yield curve. It dates to 2001.
You can see the post-tech bust, post-9/11 collapse in yields. You can also see that the first leg down ran out of gas around September 2002.
Then it got a secondary push lower in mid-2003 when former Fed Chairman Alan Greenspan and his cohorts freaked out about potential deflation and an economic collapse. They pushed down short-term rates to a then-record 1 percent. Stories at the time suggested the Fed would keep interest rates low for a long time, and the central bank itself talked up the benefits of easy money in its press release. (You can read it online here.)
|In 2003, Alan Greenspan drove down short-term interest rates to a then-record 1 percent.|
But you know what happened shortly afterward? Investors started to sniff out a change in trend, and they began to sell their Treasury notes. That drove interest rates higher.
The final straw came in March 2004, when yields made a higher high (or right “shoulder” in an inverse head-and-shoulders pattern, if you prefer to look at it that way). That ended a period of about 18 months of rate-suppression purgatory.
What happened next? Rates took off like a Polaris missile. Five-year yields ultimately didn’t stop until they had surged all the way from 2 percent to 5.25 percent — again, a full 325 basis points.
Now take a look at the right-hand side of the chart. You can see the initial collapse in yields that accompanied the credit crisis, followed by the secondary declines on QE1 and the debt ceiling collapse. The move lost momentum around September 2011, and ultimately bottomed out in mid-2012.(...)Click here to continue reading the original ETFDailyNews.com article: Proof That Interest Rates Will Keep RisingYou are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)
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