Expect 10-year yield to head lower, testing 2.50% area

AFTER threatening the 3 per cent psychological round number since April 2018, the movement in the 10-year yield over the past four months has shown that the 3 per cent level is still widely respected by the markets.

The 10-year yield did initially break above the 3 per cent area in April and May, but the bullish move was unsustainable. More interestingly, it was the false bullish breakout above the 3 per cent psychological level that formed the current Head and Shoulders pattern. Head and Shoulders pattern is a bearish formation that signals a reversal move to the downside.

The right shoulder of the pattern was established recently in August as the 10-year yield was firmly rejected by 3.00 per cent psychological level once again. Thus, for the bearish Head and Shoulder pattern to be valid, the 10-year yield needs to break and close below the neckline or uptrend line at 2.84 per cent.