UST2Y US 2-Year Yield Monthly Chart; Overbot Yield; Negative Divergence; Expansion (Megaphone) Pattern; 2-Year Yield Has Topped-Out for the Year

The US 2-year yield has printed the highs for the year. Whatchu talkin' 'bout Willis? Everyone knows that yields will move continually higher from here. What's this guy talking about?

The charts do not lie folks. The UST2Y 2-year yield chart is shown above. The red lines show universal negative divergence across all chart indicators. There is no more fuel available to take yields higher. Stick a fork in the yields; the 2-year yield is cooked for the year and topped-out. Can the 2-year yield sneak a bit above 5% again if news hit the wires? Of course, but on the monthly basis, the top in for the 2-year yield. Neggie d is a powerful force. The old adage that you do not fight the Fed is only superseded by the more important adage that you do not fight the powerful forces of neggie and possie d.

Humorously, Wall Street is consumed by the inflation data and actions of the Federal Reserve under Pope Powell's guidance. The universal consensus is that if the Fed keeps hiking rates, the economy will crack, a recession will begin, and stocks will sell off. Conversely, these so-called smart people believe that when the Fed stops hiking, that will confirm a soft landing without a recession, and stocks will soar. Thus, when there is a hint of higher inflation, that means the Fed will continue to hike, and stocks sell off. When inflation data subsides, as it has recently, that creates the soft landing narrative and investors and traders buy stocks with both fists.

Won't they all be surprised when yields fall lower and stocks sell off at the same time? It will be fun to watch. It will probably be a credit crisis in US banks a la March or economic failures and defaults in other countries that serve as catalysts for the pending fun.

The RSI and stochastics are overbot agreeable to a pullback in yields. The expansion, or megaphone, pattern is clearly visible in the yield behavior since the back half of last year (red lines) to present. Yield violated the upper band from late 2021 through mid-2022. The middle band, which is also the 20-mth MA at 3.45%, is on the table and this target forms a confluence with the lower trend line of the megaphone pattern providing some street cred as a future landing area (3.45%-4.00%).

Remember, this is a monthly chart so think long term as in months and a year or two although huge moves lower may occur in yields in far shorter time periods like the pandemic. Also remember that note and bond yields move opposite to price. For the COVID-19 pandemic, investors and traders ran to the perceived safety of Treasuries so note and bond prices were driven higher and the corresponding yields dropped faster than a prom dress at midnight.

Once the corrupt Federal Reserve and Congress started pumping monetary and fiscal stimuli into the economy to recover from the pandemic (the opposite of capitalism), traders received the all clear to buy stocks with the easy money and shun notes and bonds (Treasury prices drop so yields drive higher). The Fed is also in a raising mode pumping yields higher.

Unrest in the world, ongoing and future wars, and rumor of wars, geopolitical problems, and the US presidential race will heat up each week and month ahead. Any fear or worry would only drive yields lower since people will be seeking the perceived safety of US Treasuries (higher prices as demand for Treasuries increase which sends yields lower).

If you plug in UST5Y, UST7Y, UST10Y and UST30Y, you can see that those charts all show the indicators sloping lower, however, the yields have not come up for a matching or higher high. Thus, the 2-year yield is the only one with negative divergence so far. This behavior hints that the yields for the other durations may have to float higher in early August to lock in their neggie d. You can also see this with the TBT ETF. As the yields for the other durations move higher, if they do, the 2-year may sneak above 5% again. This does not have to happen but may be on tap in early August as the stock market tops out.

If the stock market rolls over and dies, which is expected on the weekly basis going forward due to the developing negative divergence (stocks are topping out in the days ahead and week or two), the fear will send investors and traders into the perceived safety of notes and bonds (prices up yields down)).

The green lines show the positive divergence that launched the 2-year yield in 2021. Interestingly, the stochastics and ROC remained flat to a hair negative hinting that no matter how high yields went, they should weaken at some point and move lower again. Contrast this with the current neggie d in play where ALL the indicators are sloping lower (red lines) as yield moves higher and there is no ambiguity. Look at that. Keystone used a ten dollar college word.

The Aroon shows the boat clearly loaded to the higher yield side with the party (note and bond negativity expecting lower prices and higher yields) in full swing. The Aroon green line shows that 84% of the note bears are convinced that yields will move higher forever in the long-term time frame. Comically, the Aroon red line shows that 100% of the note bulls, that expect higher note and bond prices with corresponding lower yields, believe that yields will actually continue to move higher. Every one of them. That is funny.

In other words, there are no note and bond bulls remaining; everyone is a Treasury bear, even the Uber driver, shoeshine boy, doorman and cafeteria lady, expecting lower note and bond prices and higher yields. You know what happens when everyone is loaded on one side of the boat, right?

The SPX daily chart is cooked with neggie d so there is no oomph or need for it to move higher in that time frame. The SPX weekly chart, however, still has a long and strong MACD so the top on the weekly basis for the stock market is still likely a few days or week or two away (see previous charts).

Thus, mixing all the analyses together and sprinkling on some voodoo dust, the US stock market is expected to top-out on the weekly basis any day forward and begin a multi-week downturn. The weak utilities indicate that it will not be a run of the mill downturn of -5% or -10%; it will likely be double or triple that. This meshes perfectly with the top in the 2-year yield since traders will be running into Treasuries buying with both fists sending note and bond prices higher and yields lower as the chart above forecasts. Stocks and yields will drop (Treasury prices higher) into the Fall and year-end. The Drop. 

Are you ready for the festivities into year-end as every Wall Street analyst tells you that stocks are going to catapult higher while yields remain steady? Who do you think is correct for the back half of the year? Keystone or all of Wall Street? This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

Note Added Wednesday Morning, 8/2/23, at 5:22 AM EST: The longer duration yields such as 10's and 30's drop 6 to 8 basis points yesterday while the 2's on the front end retreat a couple of points. Same vibe this morning with the 2-10 spread dropping into the -80's range. Fitch downgrades the US credit rating last evening reminiscent of August 2011.

Note Added Thursday Morning, 8/3/23, at 4:00 AM EST: The yields are 2-yr 4.89%, 5-yr 4.28%, 10-yr 4.15%, 30-yr 4.26%. The 2-10 spread is dis-inverting up to -74 basis points. For today, the 2's are up 1 bip, the 5's gain 4 bips in yield, the 10's are up 7 bips and the 30's are up 8 bips. Yields climb on the long end.