U.S. TREASURY YIELDS AND SHALLOW OUTLOOK

• US Treasury rates have soared in recent weeks amid the Fed’s hawkish revaluation monetary policy outlook
• The short end of the curve saw the biggest moves, with the 2-year yield up around 88 basis points to 2.32% in March
• With short-term yields rising, SHY will remain on a bearish trajectory in the short term

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US Treasury rates rose aggressively across the curve in March, but the short end saw the biggest increases due to the hawkish reassessment of the Fed’s monetary policy outlook amid inflation dazzling. Against this backdrop, the 2-year yield jumped 88 basis points to 2.32%, while the 10-year yield jumped 63 basis points to 2.45% so far this month.

In recent days, several members of the Federal Reserve have added fuel to the fire, adding to the surge in yields by calling for borrowing costs to move faster from one accommodating to a neutral position and signaling their willingness to increase in increments of 50 basis points if necessary.Wall Street took the aggressive tightening message in stride, in fact, stocks have rallied significantly since mid-March, so policymakers will have no reason to backtrack or tone down the rhetoric Short term.

Economic indicators coming out in the next few days could catalyze the next leg up in rates, especially the latest jobs report. Focusing on the NFP, the survey, to be released on Friday, is expected to show that the US economy added 490,000 jobs in March and the jobless rate fell a tenth of a percent to 3.7%, the lowest level since February 2020. Strong results will strengthen the case for aggressive stimulus removal with the aim of restoring price stability.

Traders should also keep an eye on average hourly earnings. February’s numbers were weak, but wage growth had been strong in a tight labor market, so the trend could resume its ascent. Although pay raises are good for workers and help offset the erosion of purchasing poweran acceleration in earnings can to strenghten inflationary forces, reinforcement the argument for anticipated interest rate hikes.

Headline CPI hit 7.9% year-on-year in February, a four-decade high. This metric was is expected to peak in the first quarter, but since much of the pressure on commodity prices from the military conflict in Eastern Europe has yet to be felt, inflation is unlikely to peak until the middle of the year or even later. This means that the annual CPI could exceed 8% and even flirt with 9% in the coming months, a situation that will encourage central bankers to be more belligerent. As a result,of short time Treasury rates will remain on the rise before the next FOMC meeting and the the summer.

AMERICAN TREASURE MAKES VS SHY

There are many ways to speculate in the Treasury market, but it’s important to understand that when yields go up, bond prices go down..

If we believe that short-term government rates will continue to rise due to aggressive monetary tightening to the skyline, we should expect short term treasury price to let down (there is an inverse relationship between these of them variables as previously stated). To position themselves for lower bond prices, traders might consider making a bearish bet on the iShares 1-3 Year Treasury Bond ETF, known as SHY, a fund that seeks to track the investment results of an index composed of US Treasury securities with residual maturities between one and three years (If yields on the 1 to 3 year segment of the curve increase, SHY prices will go down).

In terms of technical analysis, after breaking below 83.60, SHY has accelerated its decline and is approaching support at the 82.85 area. If the sellers manage to drive the ETF below this floor, the price could be on the verge of challenging the 2008 low near the 82.00 handle. On the other hand, if the buyers return and trigger a bullish reversal, resistance is at 83.60 followed by 84.15.

SHY TECHNICAL SHEET

SHY chart prepared using TradingView

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—Written by Diego Colman, Contributor