Stocks fell right alongside bond yields in the middle of last week, as fresh concerns over the global economy dominated headlines. The continued cascade in the 10-year Treasury note yield followed the previous week's drop in this metric below its 3-month counterpart, which many in the financial media seized upon as the dreaded "yield curve inversion" that pundits have been anticipating as a recessionary indicator. Meanwhile, against this panicked backdrop, the more traditional benchmark for predicting recessions -- the 10-year minus 2-year Treasury yield spread -- remains about as flat as the proverbial pancake, but has yet to actually invert.
In fact, the hard-and-fast plummet in the 10-year bond yield -- as reflected by the Cboe 10-Year Treasury Yield Index (TNX) -- terminated last week near the site of two historically significant moving averages. And with this duo still holding up as support, by all current indications, it certainly piques our contrarian interest to consider the percentage of market participants that are already behaving as though the "dreaded" 10-year/2-year yield curve inversion is a foregone conclusion.
Per the accompanying chart, the Wednesday lows in TNX last week were cradled by its 200-week moving average (in dark blue). While support at this long-term trendline proved rather tenuous during the second and third quarters of 2017, the index's repeated breaches here over this time frame were nearly all contained by its 160-week moving average (in light blue).
Specifically, the 160-week, after initially being surmounted during the course of TNX's post-election bull gap in November 2016, has been broken only once on a weekly closing basis in the intervening months. That September 2017 TNX low was caught by backup support at the rising 100-week moving average (in red) -- which, this time around, looms well overhead as likely resistance, having quickly rebuffed a mid-March retest after the index fell below this trendline early in the month. (Plus, the nearby TNX 26 level -- equivalent to a 2.60% yield -- already has a track record of marking highs in the index.)
TNX ultimately closed Friday's session just narrowly above its 160-week moving average, after hitting its lowest levels since December 2017 in the middle of the trading week. Going forward, traders will want to keep an eye on the index's progress as it looks to bounce from these long-term weekly moving averages, as a "failure" by the 10-year Treasury yield to fall below its 2-year counterpart in the near future could come as a surprise to those who pre-sold the "inversion panic."
Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, March 31.