US Treasury Yields Continue to Collapse

The S&P500 gave up another 0.65% last week, following the 1.5% loss the prior week. Volume jumped back during this most recent loss. After dipping while going through the year-end holiday season, volume roared back and supported the drop in prices. On the other hand, volatility did not spike; the VIX index remained virtually unchanged for the week.

The technical picture for the S&P500 is somewhat bearish in the short-term. Last week’s failure to bounce back suggests that more downside risk lies ahead. That said, the longer-term picture is still bullish. Prices remain well above the 200 day moving average. The 50 day moving average is solidly above the 200 day moving average (and showing no signs of an imminent “death cross”) and most importantly, the 200 day moving average is sloping upwards, as it has done since mid-2011, the last time the S&P went through a near-correction (just shy of a correction because the peak-to-trough drop was a bit under 20%).

At the same time, the US economic picture remains worrisome. Last week, PMI Services missed, as did factory orders initial jobless claims.  ISM services missed badly, and consumer credit disappointed. International trade came in a bit better than expected.  In the big December payrolls report, the most promising figure released—the drop in the headline unemployment rate to 5.6%—was again mostly a result of folks staying out of the workforce and of people taking multiple low-paying jobs (because they couldn’t find good high-paying jobs) to make ends meet. Sadly, average hourly earnings plunged, instead of rising as expected; this was the biggest drop in eight years. Also, this drop supports the argument that people are being forced to take low-paying jobs. Finally, the labor force participation rate dropped to a fresh multi-decade low—specifically, a 38 year low. This supports the argument that people who can’t even find low-paying part-time work are simply dropping out of the workforce, and as a result, are no longer counted as being unemployed.

Finally, the US Treasury market made news last week, again. While the rate on the 10 year Treasury plunged to one-year lows in October, a couple of months ago. Last week, the rate returned to the same lows (the 10 year yielding 1.88%) but it did so in a much more controlled and deliberate manner.

This suggests that the rate plunge was not some sort of trading aberration that corrected itself and would not return. Instead, this suggests that low rates are here to stay for a while, and in fact could be head lower…..as suggested here numerous times over the last 8-12 months.

If rates don’t bounce back next week, and if oil (and other commodities) don’t bounce back in price very soon, then the next stop on the US 10 year yield could be 1.5%, which would be approaching multi-decade low set in 2012.

So anyone who’s been betting on lower rates—while almost all of Wall Street has been betting on rising rates—could be in for another successful outcome, following an outstanding result in 2014 when the 10 year rate plunged from about 3.0% to about 2.15% by year end.

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