The Federal Reserve (‘the Fed’) started adjusting the federal funds target rate up on March 17th, 2022. The Fed raised the Fed Funds Rate 25 basis points (bps) to the range of 0.25% to 0.50%.
10 days prior to the Fed Funds Rate increase, we published our first post on the 10-Year treasury note yield (TNX, ^TNX): Will the 10-Year Treasury Note Yield (^TNX) Drop Further to Meet Its 14-month Support?
There is an indirect connection between the Fed Funds Rate and the 10-Year treasury note yield. Generally the correlation between the Fed rate and the 10-year treasury note yield is positive, implying that when the Federal Funds Rate increases, the 10-year treasury note yield tends to increase as well. Together with that, other factors can play a significant role in determining long-term interest rates, making the relationship complex. To name a few: economic conditions, inflation expectations, investor sentiment, and market forces. Therefore, while a positive correlation exists, other influences can cause deviations from this correlation.
The 14-month support we referred to in that article was the 59-week SMA. It was at 1.517% and ^TNX was at 1.791%. Here’s the weekly chart we shared on March 7th, 2022:
- Moving Average Support for the 10-Year Treasury Note Yield Approaches 2%
- The 10-Year Treasury Note Yield Flees Its Best Respected Support Line
Fast forward 16 months to today, the Fed Funds Rate sits in the range of 5.00% to 5.25% while ^TNX is at 3.819%.
But guess what. The 59-week SMA is still the yield’s best respected support line. Tenure is up to 30 months now:
Zooming in:
Since October of last year the yield and the support line moved towards each other until they met in the first week of April. They danced together for several weeks, and ^TNX even broke the wick support line twice (pushing it from 59-week SMA to 62-week SMA). But then in May the yield moved up and it has been hovering above the 59-week SMA line since.
Is the Fed Funds Rate about to go down?
We don’t suggest prophecy. Indeed, in the last 4 months the yield has been close to its best respected support line than it has since the beginning of 2022. However, to start a move down the yield will first have to convincingly break below the 59-week simple moving average line. That’s the line to watch.
Can the Fed Funds Rate go up from this point?
Absolutely. ^TNX tested the support line for several weeks and departed with a move up. This could turn out to be a consolidation followed by a bounce off support.