Another Punch to the Gut?

So much of the financial media’s recent attention has been focused on the impulsive rally in stocks. For those not aware, we have had an equally spontaneous rally in bond yields which means their bond holdings have declined. Since the election, the US Treasury 10-year note lost more than 5% while the 20 year has declined more than 8%.  Because we have been in a 35+ year falling rate environment this move has caught some investors off-guard as they have been conditioned to their bond positions only rising in value (falling yields)

Looking at the 5-year movement of the 10-year US Treasury yield we see some interesting developments. As you can see in the chart below, the election triggered a huge move, pushing yields higher out of the downward (blue) channel. After yield peaked just slightly above 2.6% it created an overbought condition and has since been consolidating sideways and digesting its gains. As we know consolidations either lead to 1) a reversal or 2) a continuation and this one, as of now, looks very much like a continuation as it has formed a bull flag suggesting we may only be halfway done.  

Bay area independent investment advisor and fee only San Ramon CFP financial planner 2-15-17 -  $TNX

It’s too early to tell which way this consolidation will eventually take, patterns can morph, the FED can take action and of course, Trump can tweet so we have to be open to all options. But, as of now the charts are telling us market participants are expecting higher interest rates ahead. Unless investors have immunized the duration of their portfolios, they need to be open to the possibility of another punch to the gut in their bond holdings.