Because mid-May’s multiyear high at 3.11% precisely matched a target I’d put out five months earlier when rates were around 2.35%, I was open to the possibility that yields had made a major top. This seemed even more likely when the Ten-Year Note plunged to 2.76% over the next 12 days. Now, however, a strong recovery rally has shortened the odds of a move to new highs. If it is coming, it would generate headwinds above 3.25% sufficient to slow the U.S. economy or even suffocate it, since rates for mortgages and car leases would rise as well. At the very least, based on the chart shown, Ten-Year Note yields look very likely to challenge the May high, since the target is actually 0.04 points above it. The rally could turn out to be a bull trap, either by forming a double top or, less likely, an upthrust to new heights that reverses precipitously. A third possibility is that, once above May’s highs, rates will continue to rise. Whatever the case, I will be monitoring this vehicle closely, since a move into the 3.25%-3.50% range would significantly reduce the flow of oxygen to the U.S. economy’s heart and lungs — i.e., housing and autos.
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