With the December Fed meeting and its rate hike heard 'round the world behind us, I thought it may be an interesting exercise to think about at what yield level the 10-year U.S. Treasury might be a buy. Yes, I know that many market commentators have declared that the bottom has been seen for rates and that it was a generational sell for bonds. However, like everything else that trades, things don't go straight up or straight down.
In this 20-year monthly chart of the yield on the 10-year Treasury, below, I have overlaid a moving average envelope. This technique may have been invented by Gerald Appel of MACD fame. I am not 100% sure, but I'll give him credit for it. The approach is simple. Start with a moving average length that makes sense, for example, a 20-day moving average on a daily chart because it is a month of trading days. A 13-week moving average on a weekly chart because it a quarter. In this case I used a 12-month moving average on a monthly chart. The next step is to run lines above and below the moving average. This can be fitted by eye or empirical research. For this chart I started with bands 12.5% above and below and widened them out to 25%. Not all the price action is captured but the eyeball fit is pretty good. At times the yield has moved outside the bands but not for too long.
The yield on the 10-year is well above the bands now, but that is not a good enough reason to buy Treasuries. I would want see signs that commodity prices (energy and metals) were peaking and that corporate issuance had dried up and a few other clues before buying. An opportunity may present itself by then end of the first quarter. Stay tuned.