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Talking Numbers

This is the big trade Wall Street got wrong

Talking Numbers

Wall Street sure had this one all wrong.

The Federal Reserve continues to unwind its monetary stimulus program but rates are still going down. Conventional wisdom—and much of the Street in the early part of the year—say that shouldn't have happened because if the Fed is buying fewer bonds, rates should move higher. Bond yields, after all, move in the opposite direction of bond prices.

But, that's not the case. In fact, interest rates have now hit a six-month low and they could see more downside. The yield on the benchmark U.S. 10-Year Treasury note dipped to 2.525 percent on Wednesday.

(Read: US bonds hold gains; attention on CPI data)

"If there was one consensus call at the beginning of 2014 from Wall Street, it was that interest rates were going higher," said Steve Cortes, founder of Veracruz TJM. "This is a message and a warning to be careful when Wall Street reaches a consensus. Wall Street research often gets it wrong when it looks at the macro picture."

Richard Ross, global technical strategist at Auerbach Grayson, foresees lower levels for yields based on its technicals.

Ross notes that from June 2013 until February 2014, yields have stayed between 2.47 and 3 percent. However, since early February, the range tightened to 2.6 to 2.8 percent. That range was broken during Wednesday's trading session.

"Usually when that happens, it releases that energy that's been built up," said Ross, likening the 10-Year's recent chart to a coil. "You want to trade in the direction of the breakdown. Yields should continue to move lower."

Based on a longer-term chart of the 10-Year, rates made a bearish double top formation over the past several months, according to Ross, a "Talking Numbers" contributor. He sees rates headed toward 2.4 percent, where its 200-day moving average is and where resistance was in 2011 and 2012.

"That prior resistance now becomes an inviting downside target," Ross said. "I think we're going to test that 2.40 level [and] retest that 200-week moving average. You want to be a buyer of bonds in anticipation of lower yields."

(Read: How do you boost GDP? Women and guns)

Cortes says the fundamentals agree with Ross' charts showing rates headed down.

"The bond market is telling us that we're in for more of the 'muddle-through,'" said Cortes. "Are we growing? Yes, there is growth in the economy. We are adding jobs. But, it's a 'muddle-through' situation. There are not any bells and whistles to this expansion."

For Cortes, a lack of significant wage growth is part of the reason rates will stay higher. Wage growth is a key factor in inflation.

"Wages are the recipe you need to really get inflation going," Cortes said. "The last time the United States really had inflation was way back in the 1970s."

"We don't see that now," added Cortes, "so the bond market is pricing in the 'muddle-through' economy with sustained low inflation."

To see the full discussion on what's next for the U.S. 10-Year Note's yield, with Ross on the technicals and Cortes on the fundamentals, watch the above video.


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