We are currently paying very close attention to the 30-year bond yield which is testing key resistance at the 4.75% level. The highest closing yield since the 2008 collapse was 4.76% on June 10, 2009 and over the last 2 years 4.79% on June 16, 2008; meaning that this is potentially a crucial level to be aware of for bonds. Should the long bond go on to establish a higher range (higher interest rates), this would be one of the first signs of the bonds markets adjusting to positive economic date and the likelihood of the Federal Reserve raising interest rates in the near future. It should be noted that the bond market will adjust market interest rates in anticipation of the Federal Reserve moving interest rates higher. If Treasury bond yields move higher (price lower) this will push all other bond yields - such as corporate bonds - higher even if credit spreads continue to stay tight.
The 30-year bond seems likeliest to be a leading indicator of this change (the short end of the curve is too tied to the Federal Reserve's expectations) but it is highly likely to drag the benchmark 10-year note yield higher as well. As the chart below shows, the spread between these 2 yields is at the wide end of its historic range at 96 basis points (100 basis points is equal to 1%) and we doubt whether it would widen more than another 15 basis points. Should the 30-year bond yields move higher, we should expect to see the 10-year note yield move up to test key resistance at the 4.00% level. A move higher in the 10 year yield will cause lending rates - such as mortgages - to move higher as well; which could have some impact on future economic growth.
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