US 10-year treasury pauses as overbought condition normalises

The US 10-year treasury has halted its rapid ascent. Since the end of February, and over the course of 10 weeks, the yield jumped from around 1.73% to a high of 3.2%. The speed of the rise suggested that the treasury's yield had become overbought, which was confirmed by the RSI (green rectangle). Since then, the yield has pulled back to 2.92%, as the overbought condition looks to normalise (green rectangle again). This has alleviated some of the pressure that risk markets have faced over the course of the yield ascension.

However, the stochastic remains over 80 (blue arrow), which advocates that the underlying momentum is still strong. Market thinking is that the Fed's reduction of its bloated balance sheet will be supportive of policy tightening and yields reflect such. As long, as the stochastic remains in its upper quintile, we remain tentative about yield moderation. Prices don't move in a straight line and this is true for the price of money as well. In other words, this pause may be the proverbial "dip in an uptrend" scenario.

To this end we refer to a previous article, which suggests that the Fed is still too far from where it needs to be in this inflation cycle. The key here is moderation in the inflation numbers which should translate into the US 10-year treasury's stochastic moderating. That hasn't happened yet, which leads us to remain cautious.