10 Year Treasury Yield Has A Mini Crash

Reversal Thursday

I mentioned after Wednesday’s stock market close that the tech stocks and the small caps were overbought. We saw a reversal of the recent trading action on Thursday as the Dow and the S&P 500 outperformed the Nasdaq and Russell 2000. The big caps rallied after underperforming this year. McDonald’s led the Dow as it was up 4.4% after it announced a restructuring which includes corporate layoffs. The S&P 500 was nearly flat as it fell 0.07%. The Nasdaq and Russell 2000 had rough days as they were down 0.7% and 0.49% respectively. The micro cap index was down 0.71%.

Heading into Thursday we were in an interesting position because I was bullish on the S&P 500 and near term bearish on tech and small caps. Many technical traders have said the strong breadth is good news for the S&P 500. That might be true, but that doesn’t mean the small caps and tech will be rallying with the S&P 500. That would put them at extremely overbought technical levels. The S&P 500 itself is slightly overbought. The CNN Fear and Greed index went from 65 Wednesday to 62 Thursday.

Mini Crash In Treasury Yields

The Brazilian stock market had a rough day on Thursday as it was down 5.13%. The Brazilian market is down 31% since the peak on January 26th which is also the day the S&P 500 peaked. There is political turmoil in Brazil which I can explain in another article. The reason I’m mentioning it here is because it was the reason there was a mini crash in treasury yields. As you can see from the chart below, investors fled Brazil and bought U.S. treasuries.

The Fed doesn’t seem to care how its rate hikes can affect emerging markets, but if this type of impact is felt on U.S. markets, then the Fed will need to change its tune. The Fed affects global markets with its policies; this needs to be factor into how it sets rates. Brazil has others issues such as political corruption, so it’s not all the Fed’s fault, but it does have an impact. The latest difference between the 10 year yield and the 2 year yield is 44 basis points, meaning the curve flattened 1 basis point on Thursday.

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