Treasury Whipsaw

Recession Panic, then Inflation Panic

For the past year, Treasury bonds have been consolidating in a pennant formation with a high in the 10-year at about the 4.33 level. We’re nearly at the apex of that pennant now. If the stock market sells off — as I expect it will — then bond prices will climb and interest rates will crash as traders rush to safety and anticipate imminent Fed rate cuts. As the yield curve therefore reverts, calls for an official recession declaration will create a doom loop of falling stock prices and falling interest rates.

I think we can expect a bottom in the 10-year at the long-term downtrend line which began in the early 1980s, at which point emergency Fed rate cuts and other extraordinary measures to rescue the economy will create massive inflation expectations and steepen the yield curve. Short rates should stay low due to FOMC actions while long rates move much higher.

This also aligns with key horizontal support/resistance levels going back decades to the late 1990s. Note that these are logarithmic charts.

And furthermore, this prediction hits important Fibonacci retracement levels from the August, 2021, lows which represented the right shoulder of an inverse head-and-shoulders reversal pattern. This suggests the longer-term trend is higher and higher interest rates after the near-term crash.

I think that the way to play this setup is to go long of bonds right now in anticipation of the crash, then pivot into precious metals, energy, and other inflation plays.