Wednesday, January 14, 2015
Cyclical Yield Analysis Striking Results
The Cyclical Yield Low (CYL) as I had marked at 1.86% from the October 15th in 10 year Treasuries was broken today. The last time an identifiable CYL was rejected was in 2008. After the CYL was broken, the 10 year Treasury yield declined an additional 130 basis points over the next 4 weeks. A move of such magnitude would make 10 year Treasuries indistinguishable from German Bunds, unless of course the Germans were being paid to borrow for 10 years.
In my analysis dating to 1985, I have used the closing level for 10 year Treasury yields to set the parameters for the CYL analysis. In 2012-2013, I used (with success) an early September low of 1.57%, to mark the CYL even though the initial rebounding yield only reached 1.87% or 30 basis points rather than a strict parameter requisite of 39 basis points.
Similarly this year, I used an intra-session yield low of 1.86% from September 15th rather than a closing level that day of 2.14% to reconcile a sufficient yield bounce to Nov 6th high of 2.38% (24 bps). To the extent that the yield jump from the Oct 15 low was indicative of a rejected low yield, the subsequent decline in yields over the last week to today’s low of 1.78% suggests that a different light is cast on current conditions and views of risk have dramatically changed.