A 'tactical game changer' is taking place in the bond market
US Treasury yields have rallied sharply off their July lows as markets price in the possibility of further Fed tightening by the end of the year.
Selling of longer-dated Treasury securities has caused yields at the long end of the curve to rise as much as 35 basis points, running the 10-year yield above 1.70% for the first time since June 23, the day before the UK's Brexit vote.
In a note out to clients on Tuesday, the UBS technical analysis team of Michael Riesner and Marc Mu¨ller noted the 10-year yield has broken its 2015 downtrend and the development is a "tactical game changer."
The duo believes this is the beginning of a "major basing process" for the 10 year that won't be completed until the first quarter of 2017.
And UBS isn't alone in noting a breakout in yields. A note out from RBS highlighted the 30 year yield broke a weekly downtrend that has been in place since the end of 2015.
The bank notes that the move above 2.43% in the yield of the long bond opens up the possibility we see action work its way back into the pre-Brexit range of 2.51% to 2.77%, which dates back to the beginning of the year.
As for why we are experiencing this shift higher in yields, a note sent out to clients on Monday from Credit Suisse's fixed-income research team led by Praveen Korapaty highlighted several reasons.
First, the firm says markets are pricing in a more hawkish Fed. In addition to that, foreign investors are putting money elsewhere because the amount of negative yielding debt has shrunk considerably. Finally, foreign investors are parking their money elsewhere because the cost of Fx hedging has made it difficult to make money.
On Wednesday, longer dated US Treasury yields are down 2 basis with the 10-year and 30-year at 1.71% and 2.45%, respectively.