Chart 1: TNX's daily chart as at 7/5/2009 (Source: Stockcharts.com)
Looking at the monthly chart (Chart 2), we can see that TNX has been drifting lower ever since it hit a high of 16% in July 1981. The downtrend is very well captured by the red downward channel (with a slight course adjustment, reflected in the pink downward channel). While TNX is still within the downward channel- with breakout at 5.00-5.25% level- the continued rise in TNX will keep interest rates elevated for long-term corporate bonds & fixed rate mortgages, something which will not be good for businesses & consumers in this difficult time. To counteract this trend, Fed has indicated that it is prepared to buy long-dated Treasury bonds in order to reduce the yield.
Chart 2: TNX's monthly chart as at 7/5/2009 (Source: Yahoo Finance)
Could the sellers be linked to the Chinese authorities, who might be switching out of Treasury bonds into other assets (such as commodities) in order to reduce their holding of dollar-denominated assets? See Chart 3 below for movement in TNX yield & USD.
Chart 3: TNX & USD's weekly chart as at 7/5/2009 (Source: Stockcharts.com)
Some commentators, such as Marc Faber, think that the Bear Market for Bonds could have started (here). We have seen that rising bond yield has not been good for the US equity market (here). How would this impact the Asian stock markets? I believe the answer to that question will depend on how much have the Asian economies decoupled from the US economy and how much has the domestic demand of each economy picked up.
Finally, the sharp increase in TNX yield obviously reflects the concern for inflation. How fast has the pendulum swung the other way! Just a short 2 months ago, many were worried about deflation. This is indeed an interesting time!
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