REFLATION AND ROTATION

 

With a policy decision by the FOMC expected Wednesday, relative to the direction of interest rates, I felt it may be beneficial to review a chart of the 10-Year U.S. Treasury Yield (2.38%).

I am looking for levels that, if violated on the upside, may reignite the recent talk about reflation and lead to further rotation by the domestic equity market towards value, in lieu of growth/momentum. According to Investopedia, “reflation is a policy designed to expand a country's output and curb the effects of deflation, which usually occurs after a period of economic uncertainty or a recession.” 

10-Year U.S. Treasury Yield (EOD) Index going back to 2006. 

Summary: Based on the chart above, a 10-year yield above 2.62% on a closing basis may ignite talk about reflation and possibly more rotation, as described above.

Additionally, while I was wrong at the beginning of 2017 in thinking that interest rates were going to move higher during the year, in viewing the chart below and realizing that the direction of the 10-Year Treasury Note moves in the opposite direction of its yield (yield going up equates to price going down), it looks like a move above 3.05% will indicate the end of the bull market and the start of a bear market for the 10-Year Treasury Note.   

10-Year U.S. Treasury Yield (EOD) Index going back to 1983. The long-term downtrend in the 10-year yield would be broken by a close above 3.05 percent. 

It looks like some Wall Street participants are getting a head start on the “reflation trade” (they may be hedging against an uptick in inflation—theoretically TIP goes up as inflation rises) as the iShares TIPS Bond ETF (TIP/$113.62) is trending higher—defined by a pattern of higher troughs and higher peaks—and also outperforming (lower frame) the 7-10 Year Treasury Bond ETF (IEF/$105.84). This strategy seems prudent, especially for those who remain overweight fixed income.   

iShares TIPS Bond ETF chart. TIP relative to 7 - 10 Year Treasury Bond (ETF). Rising line means TIP is outperforming IEF. 

Have a wonderful rest of your week. Please know that Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies.   

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 12.11.2017. Chart sources: Stockcharts.com.

Print Copy of article: Day Hagan Tech Talk December 12, 2017 (PDF)

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