Bonds entering the ‘danger zone,’ market watcher says

Since 1981, prices of U.S. bonds have generally gone in one direction: up. But, according to one widely followed technician, the long boom could be heading for a bust.

Piper Jaffray's Craig Johnson says bond yields are entering a "danger zone" as they approach 2.60 percent.

"When you've had these major inflection points in interest rates, they've corresponded pretty well with the starts and ends of secular bull and bear markets," he told CNBC's "Trading Nation" on Thursday. "I have to question whether bond investors [and] central banks ... can make this smooth transition from a downward sloping interest rate environment to an upward sloping environment and not see this market stumble."

Bond prices and yields move inversely to each other.

Take the bond market spook-out Wednesday when reports of China possibly curtailing its purchases of U.S. Treasurys sent bond yields sharply higher. The yield on the 10-year approached a 10-month high of just under 2.60 percent on Wednesday on those fears that China may pull back on its U.S. bond buying.

According to Johnson's chart work, a break above 2.70 percent might unleash a torrent of selling for U.S. Treasurys.

Federal Reserve members have expressed a willingness to raise the federal funds rate at least three times this year, moving off of the historically low levels of the financial crisis. Fed funds futures price in the hike in March, the second in June and a possible third in December – at a presumed steady increase of 25 basis points each time, the fed funds rate would then end the year at 2 percent to 2.25 percent. Bond prices typically fall when rates rise.

Rates around the world have been increasing on signs of a global recovery. Mark Tepper, president and CEO of Strategic Wealth Partners, says rising interest rates are a vote of confidence for the economy and should not meaningfully impact corporations' spending plans.

"If anything we would argue that a rising 10-year yield just indicates continued confidence in both the economy and corporate earnings and it should be good for stocks," he told CNBC. "We're a firm believer that tax reform is going to stimulate capex and we don't think rising rates are going to prevent corporations from borrowing so they can fund their infrastructure investments."

Already, a string of corporations have announced changes resulting from the Republican tax reform bill passed in December. Walmart plans to raise its starting wage and offer paid parental and maternity leave, Wells Fargo upped its base wage, and AT&T and Bank of America announced bonuses for their workers.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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