Why the Treasury rate rally could be about to stall

U.S. government bond yields are hovering at their highest in a little over a month, but if history is any indication, the latest rally in interest rates could be short-lived.

The direction of interest rates is a significant bellwether of market sentiment. Higher rates suggest a strengthening economy, as investors tend to exit bonds in favor of meatier returns in other asset classes.

Should rates retreat, however, it may suggest investors are seeking the relative safety of government debt, and that expectations for the economy’s performance could be waning.

Looking at the ten-year yield over the last year, top technician Carter Worth pointed out that while rates have rallied particularly into the last week, a look back to the beginning of 2017 suggests another pullback.

In Worth’s chart of the ten-year yield, he points to five other “distinct counter-trend moves,” or rallies, in rates that ultimately ended in a drop. Rates move inversely to Treasury bond prices.

“Each one of [these rallies] has been quite symmetrical in terms of duration and magnitude,” he explained on CNBC’s “Futures Now.” this week. “Typically between 25 and 30 basis points, and somewhere between two weeks, that is ten sessions, and 3 weeks, fifteen sessions.”

And since Worth’s chart indicates that rates in September had already climbed for 8 straight sessions, a pullback in Treasury yields might actually be in the works.

Wall Street’s consensus was that at the beginning of the year, analysts thought rates would be climbing to 3.25 percent. However, says Worth, the fact that Treasury yields fell as low as 2 percent this year doesn’t bode well for that prediction.

“The burden of proof remains on those making the case for higher yields, because those making the case for lower yields just have to point to two facts,” he said.

“First, the consensus to start the year at 3.25 percent” has fallen short and is unlikely to be reached, Worth said. “We’ve had other counter-trend rallies like this, moves up in the 10-year, only to stop each time,” he added.

As a result, Worth suggests looking at sectors like utilities or health care. He also urged investors to be particularly cautious on financials, as he believed many of the names in that sector are still struggling on a business level.

Treasury yields did actually fall on Friday, down 1.5 percent from Thursday.

U.S. Treasury yields have gained in the wake of the Federal Reserve maintained its near-term outlook on interest rate increases. The central bank intends to begin reversing a massive bond-purchase program it began during the financial crisis.