10-year yield rose 0.144 overnight to close at 4.316, breaking above 38.2% retracement of 4.997 to 3.785 at 4.247. A more important perspective is that strong support was seen from 55 W EMA and long term channel, as seen in the weekly chart. Combined, the development suggests that fall from 4.997 has completed at 3.785 already. Further rally is now expected as long as 55 D EMA (now at 4.143 holds), to 61.8% retracement at 4.534 and possibly above.
Nevertheless, there is no change in the view that price actions from 4.997 are developing into a medium term corrective pattern. Rise from 3.785 could be seen as the second leg. Upside should be capped by the 4.997 to bring the third leg down to 3.785 and below.
This technical scenario aligns with the prevailing expectation that Fed’s next move will be a rate cut. The duration and extent of the current rebound in 10-year yield will depend on when Fed decides to initiate policy relaxation. In essence, the more Fed postpones its initial rate reduction, the more prolonged and substantial the climb in 10-year yield could be. Still, this scenario would not push yield beyond 5% handle. However, decisive break of 5% would signal a significant shift in the underlying economic and monetary policy outlook and necessitate reevaluation of these expectations.
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