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BENCHMARK TREASURY YIELD STEADIES AHEAD OF FED, BIGGER MOVE STILL BREWING

Investors are heading into this week’s FOMC decision with plenty of anticipation, especially since it’s the first meeting led by Kevin Warsh. The expectation is that the Fed will leave rates unchanged in the 3.50% to 3.75% range when things wrap up Wednesday. Still, policymakers have their hands full with inflation risks, particularly if oil prices stay elevated or tensions in the Middle East flare up again.

In the bond market, the U.S. 10-year Treasury yield US10YT=RR closed Tuesday at 4.428% and is roughly flat on Wednesday, hovering around 4.43% after the latest May retail sales data came in above estimates. But the bigger picture hasn’t shifted much -- traders remain focused on the monthly chart, where yields are stuck in a multi-year symmetrical triangle.

There have been a few attempts to break out of that pattern in both directions, but none have gained traction. Yields, for instance, climbed as high as 4.687% in May before settling back to end the month at 4.453%. So far in June, the move up toward 4.58% has stalled right near the upper boundary of the triangle, prompting expectations for a pullback toward the 20-month moving average, currently around 4.27%.

At the same time, volatility remains unusually low. The Bollinger bandwidth hit its tightest level since May 1989 at the end of last month and has only inched higher so far in June. That kind of compression doesn’t point to direction, but it does hint that a bigger move could be coming -- like a market coiling up.

If yields hold above the 20-month average, the bias can still lean higher. A break above 4.58% could open the door to 4.81% or even 5%. On the flip side, a move below that average would shift the tone, potentially pulling yields back toward the 4.02% to 3.92% range -- or lower.

(Terence Gabriel)

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