The impressive pre-year-end rebound in US stocks might have caught most attention. But there are two very important developments. Firstly, bond yields took a sharp tumble. 10-year yield closed the year at 2.686, comparing 2018 high at 3.248. Also, it’s actually the lowest since January 2018.
We’re maintaining our view that TNX is heading back to key support at 38.2% retracement of 1.336 to 3.248 at 2.517, which is close to long term channel support at around 2.49.
And more importantly, the yield curve hasn’t be that inverted for a long time. It’s clearly inverted from 1-year (2.619) to 2-year (2.504) and then 3-year (2.462). 5-year yield at 2.511 is way below 1 year yield. 6-month yield at 2.486 isn’t too far.
Another development to note is that markets are now pricing in just around 2.5% chance of a Fed hike in march to 2.50-2.75%.
And there’s just around 11% chance of a rate hike in 1H.
It looks like investors are expecting something rather ugly ahead in 2019.
