The question on the breakout is, which way will it be?
As things stand, the bond market is sending some form of message that needs heeding. The flattening of the yield curve is ominous in itself. That suggests if the Fed does adopt a quicker pace to tightening, it could be a policy mistake and negatively impact economic growth. However, stocks may beg to differ so that makes it tough for the Fed to toe the line.
Given the circumstances, even a more hawkish Fed (at least looking for three rate hikes next year) may not be enough to convince the bond market to steer clear of a further flattening of the curve.
It may be enough to keep the dollar elevated in general. But up against the yen, gains may not be easy to come by if bond buyers push long-term yields lower in the aftermath.
Holding above the trendline support just above 1.35% will be key in that sense.
There is certainly a case for yields to gain traction to push higher on a more hawkish Fed but again, there is also an argument for otherwise as pointed out above.
That is going to make it tricky to navigate post-FOMC.
However, one can always go back to the chart to try and make sense of things. And I reckon, this might be one of those times as the bond market continues to do some soul-searching. As for other asset classes, best be reminded there's the old adage that the bond market is always right.
