Since the Federal Reserve committee removed the word "patient" from its March 18 statement, the 10-year U.S. Treasury yield skyrocketed 29.53%, from 1.93% on that day, to 2.5% on June 10 after the release of a strong May jobs report by the U.S. Bureau of Labor Statistics. The yield has been descending since then, as the June jobs numbers came in below estimates while the April and May numbers were also knocked down by big revisions. 

In fact, the Department of Labor said more than 400,000 people left the labor force in June, pushing the labor force participation rate to a 38-year low at 62.6%, meaning 93.6 million Americans, 16 years and older, did not have a job and were not actively trying to find one.

The forward and backward looking U.S. economic data of late have been mixed at best. The U.S. Bureau of Economic Analysis said on July 30 that the first estimate of second quarter 2015 U.S. GDP was 2.3%, missing expectations of 2.6%. For the first half of 2015, the GDP was revised upward to 1.45% from 1.25%.

The Labor Department said on July 31 that the employment cost index (ECI), the broadest measure of labor costs, edged up just 0.2%, the smallest gain since the series started in the second quarter of 1982. Economists polled by Reuters had forecast the employment cost index rising 0.6%. Wages and salaries in the U.S., the data that the Fed most watches, seemed to go nowhere despite a tight labor market. Weak ECI figures sent the U.S. 10-Year Treasury Note yield tumbling 3.58%, to close at 2.187% on Friday, below the 50% Fibonacci retracement level.

The rally in the bond market, starting in the beginning of July, could signal that the Fed rate hike will hurt the U.S. economy, which has been very slow to recover since 2009. The spread between the 2-Year and 10-Year Treasury Note yields fell to 1.485 percentage points on Monday, the lowest level since the end of April. The gap has shrunk from 1.75 percentage points, when the 10-Year Treasury Note yield hit a high of 2.5% on June 10. Technically, there are near-term supports for the spread at around the 1.35 and 1.19 percentage point levels, if the yield curve continues flattening.

The 2-Year Treasury Note yield, which has been stuck under 0.75% since the beginning of the year, ticked lower to 0.665% on Monday after the Institute for Supply Management’s manufacturing (ISM) index unexpectedly fell to 52.7% in July from 53.5% in June, missing the forecast of 53.7%. The 2-Year Treasury Note yield, which has been moving in an ascending wedge since mid-2013, could break down and dive back to the 0.35% level.

As of July 28, there are 747,004 short positions of 10-year U.S. Treasury Notes, traded on the Chicago Board of Trade (CBOE:TNX), by leveraged funds. This is compared to about 485,635 long positions, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. As the U.S. equity markets are stalling and the U.S. economy looks wobbly, hedge funds were piling into buying the long-term notes last week as there was a net increase of about 50,636 contracts in long positions from the previous week, where TNX contracts are traded in units of $100,000 face value.

From our technical viewpoint, the yield of the U.S. 10-year Treasury notes just broke down the 2.23%, or the 50% Fibonacci retracement level. The near-term support is 2.05%, or the 61.8% Fibonacci retracement level. In the event of a breakdown of the symmetrical triangle chart pattern, the near-term support is 1.68%. The Department of Labor will release the July non-farm payrolls data on Friday, with expectations of 225K jobs gain. If the number turns out to be weaker than expected, the yield could dip below 2% by September or October.