When fundamentals don’t make much sense, we rely on technical analysis for guidance. Charts are useful in order to extract the signal from the noise. Finding patterns is the essence of investing.

We reviewed all the big declines in bond yields since the beginning of the secular downturn in interest rates in 1981. What we found was that from each historic low, the 10-year Treasury yield retraced 50 to 61.8 percent of the drop over a span ranging from 2 months to 14 months.

The fundamental reasoning almost did not matter, this curious pattern held every time.

1981-84: The 10-year yield fell from a high of 15.8 percent in September 1981 to a low of 10.1 percent in May 1983. Then rose to 13.9 percent over 12 months and retraced 61.8 percent of the decline.

1987-88: The 10-year yield fell from a high of 10.2 percent in October 1987 to a low of to 8.1 percent in February 1988. Then rose to 9.4 percent over 6 months and retraced 61.8 percent of the decline.

1994-96: The 10-year yield fell from a high of 8.1 percent in November 1994 to a low of 5.3 percent in December 1995. Then rose to 7.1 percent over 7 months and retraced 61.8 percent of the decline.

1997-2000: The 10-year yield fell from a high of 6.9 percent in April 1997 to a low of 4.1 percent in October 1998. Then rose to 6.8 percent over 15 months, retracing nearly the entire decline.

2000-02: The 10-year yield fell from a high of 6.8 percent in January 2000 to a low of 4.1 percent in October 2001. Then rose to 5.4 percent over 5 months and retraced 50 percent of the decline.

2002-03: The 10-year yield fell from a high of 5.4 percent in March 2002 to a low of 3.1 percent in June 2003. Then rose to 4.6 percent over 2 months and retraced 61.8 percent of the decline.

2007-09: The 10-year yield fell from a high of 5.3 percent in June 2007 to a low of 2.1 percent in December 2008. Then rose to 4.0 percent over 6 months and retraced 61.8 percent of the decline.

2011-13: The 10-year yield fell from a high of 3.7 percent in February 2011 to a low of 1.4 percent July 2012. Then rose to 3.0 percent over 14 months and retraced slightly more than 61.8 percent of the decline.

In our current cycle, the 10-year yield fell from a high of 3.2 percent to a low of 0.4 percent in March 2020. The 50 percent retracement of the decline comes in at 1.8 percent. The 61.8 percent retracement target is 2.1 percent. We should reach either level in the next 9 to 12 months. 

This seems inconceivable given the grim economic reality, but the historical pattern is clear. As we often like to say, the future is not always a reflection of the present.

What if the steep, dramatic decline in the US economy is followed by an equally rapid upturn? The post-virus economy takes off “like a rocket ship”?

What if the unprecedented speed and scale of the fiscal and monetary response, plus the effects of a continued retreat from globalization, lifts inflation past the 2 percent target that the Fed has had a tough time attaining?

What if the soaring government debt load and record-wide fiscal deficit has investors worrying about debt sustainability again?

What if there are no buyers for the colossal amount of bonds to be issued?

What if, what if, what if?

This time is never different and a sharp repricing in government bonds is coming.