Bonds are at a ‘critical juncture’ ahead of Fed decision

Ahead of the Federal Reserve’s rates decision Wednesday afternoon, one technical analyst sees the bond market facing a new big test.

The 10-year Treasury yield is “at a very critical juncture here at 1.9%,” Matt Maley, equity strategist at Miller Tabak, said on CNBC’s “Trading Nation” on Tuesday. “The reason why that’s important is that 1.9% is where the trend line going all the way back a full year comes in, and it’s also the September highs.”

Maley says that any meaningful move above 1.9% would push it above its trend line and give it its first higher high in more than a year. The 10-year briefly traded above 1.9% in mid-September. It has not traded firmly above it since July.

“If it gets above 2% and holds there, that has implications for the bond market, but also for the stock market as well. I mean let’s face it, banks are cheap and looking for higher rates to help them move higher, and utility stocks are expensive and higher rates will hurt that group so it could cause a rotation in that market,” said Maley. “So it’s at an important juncture for a couple of different markets right now.”

Gina Sanchez, CEO of Chantico Global, says the next move of the 10-year rests on what Fed Chair Jerome Powell says after the meeting Wednesday.

“Really what we have here is whether or not Powell signals that this is the end of the midcycle correction,” Sanchez said during the same segment. “If so, I think you’re going to have a lot more upward pressure on the 10-year, and that not only [negatively] affects the bank sector and the utility sector, but I would argue that it also affects high-yield credit and high-grade credit.”

Markets are pricing in the near certainty of a 25 basis point rate cut at the October meeting, according to CME fed funds futures. That would take the effective funds rate down to 1.5% to 1.75%.

Disclaimer