Technical Analysis

Major 2Y & 10Y yields (w/ Japan the exception) moved higher in 2022 as CB shifted policy

Both 10 and 2 year yields moved higher in 2022, pushed by much tighter central bank policy.

10 year yields moved sharply higher in 2022

The chart above shows the 2021 end of year 10 year yields, the end of year 2022 10 year yields, along with the changes for the year in those yields for major global countries.

The largest gains in 10 year yields for the year were in EU as the markets started to discount higher yields in 2023 to fight inflation due to a more hawkish ECB going into 2023. The German 10 year is up 2.753%, the France 10 year is up 2.82%, Spain 10 year is up 3.066% and Italy rose the most by 3.535% from end of 2021 levels.

Japan is the expectation to the run higher as the Bank of Japan maintained a ceiling on 10 year yields at 0.25% for most of the year before raising that cap to 0.50% in December. The end of year yield closed at 0.41%.

In the US, the 10 year yield moved up 2.365% from end of 2021 levels (or 236 basis points). From the high in yield that was reached on October 21 at 4.335%, the 10 year yield has moved lower and is closing 2022 at 3.879%. The low for the year was on the 1st trading day of the year at 1.529%.

Technically, the 10 year remains above its 100 day MA at 3.637% (blue line in the chart below) after dipping below in early December. Those dips in early December found support near the 50% of the move up from the August low. Remember as well the Fed was more hawkish at their December 14 meeting raising the terminal rate to 5.1% from 4.6% in September.

US 10 year yield is off highs but above 100 day MA

Although the 10 year yield is off highs for the year, it will take a move below the 100 day MA (blue line) to give the downside more of a shot in 2023. That level is also where the 38.2% of the move up August low. Below that the 50% level at 3.426% will be eyed and below that is the rising 200 day MA at 3.257%

Those targets should be some tough downside hurdles, however, without the Fed shifting policy in 2023. Putting it another way, they are yield support levels into 2023.

Overall, since August when the last low yield level was reached at 2.516%, the Fed has tightened an additional 200 basis points with increases of 75 basis points in September and November and an additional 50 basis points in December. That pushed the Fed Funds target to 4.5% currently (with expectations for more in early 2023).

The current yield at 3.88% is 62 basis points below that Fed Funds target level and with the potential for another 75 basis points from the Fed in 2023, hopes to the downside are limited, barring a shift in Fed expectations. However, judging from the Fed comments in December, that shift is not likely soon which should make the 100 day MA a tough nut to crack going into 2023.

Taking a look at the 2 year yield changes, the European yield changes (in bps) is near the US change of 3.69% (or 369 basis points) in 2022. The German 2 year yield is up 3.40%, and Spain is up 3.62% with France and Italy between those changes. Of note is the Euro 2 year yields were negative at the end of 2021. As a result, with Italy 2 year at 3.34% and German current 2 year yield at 2.76%, they are well below the comparable US 2 year at 4.427%.

A contributor to that spread is that the ECB hiked rates by 2.5% or 250 basis points in 2022 vs 4.25% in the US.

2 year yield comparisons vs major countries

Looking at the chart below, it shows the change in the 2 year yields in respective countries vs the change in the target rates by the respective central banks.

IN the US, the fed hiked rates 4.25% (from 0.25% to 4.5%) in 2022. The 2 year yield is up 3.69% or 369 basis points in 2022 (the rate is 4.427%). The negative spread between the change in central bank rate to the current 2 year yield is saying the Fed is ahead of the curve. Their policy is restrictive.

In comparison, the European yields are above the the change in ECB policy. For Spain, the 2 year yield is up 3.62% or 262 basis points vs only 250 basis points of tightening in 2022.

Clearly, the market is saying the ECB is behind in their tightening and indeed that was supported by the more hawkish ECB statement and presser by Lagarde in December.

Looking at the other countries, Canada with 4.0% or 400 basis points of tightening in 2022, has seen their 2 year move up by 3.10% (or 310 basis points), indicative of the markets belief that the tightening cycle may also be more near an end in that country going into 2023. New Zealand, Australia and UK have seen near equal changes in 2 year yields to changes in policy rates in 2022 (all with 27 basis points).

2 year yield change vs central bank policy change in 2022

Looking at the 2 year yield on the daily chart, the current 2 year yields is at 4.427% vs a Fed funds target at 4.5%. Once again the expectations are for the Fed to continue to tighten into 2023 (up to 75 basis points from them), but the market is not so sure with the 2 year below the current Fed funds target of 4.5%.

If the market sentiment gets even more bearish on the economy with expectations for inflation to tumble, a break below the rising 100 day MA at 4.127% will be eyed as a technical clue. Get and stay below that level would tilt the bias more to the downside. with the 200 day MA at 3.465% (and rising) another target. Ahead of that, watch 3.80% which is the 50% of the move up from the July corrective low.

Those levels would need to be broken and if so, would be indicative of an economy that is rolling over with inflation coming back toward the 2% target area.

Absent that, and the market is continuing to spar with the Fed and the economic data, and waiting for either a more hawking winner (more inflation/continued strong employment) or bearish winner (lower inflation/higher unemployment)

The US 2 year yield is above the 100 day MA

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