These charts offer a warning to the next generation - a new era of higher Treasury yields may be coming

By Tomi Kilgore

The alternative to an 'explosive' breakout could be that yields rise a little more, enough to cause economic deterioration and lower yields. Is that better?

This "pennant" chart pattern warns that Treasury yields could be headed much higher.

A generation of investors have known only one thing about long-term interest rates - if you wait, yields will go lower. There's now reason to worry that the opposite may be true.

There are many charts that technicians have claimed to be the most worrisome in the current market environment, but there's one that likely takes the cake - a very long-term chart of the yield on the benchmark 10-year Treasury note BX:TMUBMUSD10Y.

The key to this chart is what is known as a "pennant" consolidation pattern that has formed over the past few years, that suggests yields could be headed much higher for longer.

The reason that matters is that the 10-year yield influences rates on everything, from yields on bonds issued by Big Tech companies to pay for the artificial-intelligence buildout, to rates on mortgages, car loans and credit cards.

Read: The bond market has a warning for the Fed: Get serious about inflation and potential rate hikes ASAP.

"This risk is very real that we continue to see higher rates here, at least over the short run, perhaps even substantially higher rates," said Brian LaRose, technical analyst at ICAP Technical Analysis, in a webcast.

The 10-year yield had soared off the COVID-induced bottom of around 0.5% in 2020 to a peak a touch shy of 5% in mid-October 2023. The yield has been consolidating with a narrowing range that looks like a pennant, with lower highs and higher lows, since then.

Pennants are viewed as continuation patterns, which means the charted instrument tends to break out in the direction of the trend that preceded it.

For the 10-year yield, that means the breakout would come in the direction of the rising "flagpole."

For ICAP's LaRose, the bull case - if the pennant is completed in usual fashion with a breakout above the falling top trendline - is that the yield doesn't stop at the October 2023 high around 5%, or even a little higher at 5.5%. The 10-year yield rose 4.6 basis points Tuesday to 4.668%. That was the highest yield since Jan. 14, 2025, according to FactSet data.

Also read: The bond market is already hiking rates as Kevin Warsh takes over as Fed's new chair.

He believes there's a risk of an explosive move higher, to a range of 6.25% to 6.8%, and perhaps as high as 8.1% to 8.6%. He would call that the "wheels come off the bus" scenario.

What worries LaRose about this scenario was that in the past it would have been just a technical view, but the current pattern has developed along with a "major catalyst" - rising energy prices resulting from the Middle East conflict.

And the yield rise isn't just a U.S. phenomenon, as government bond yields around the world, such as on the U.K.'s gilts, Germany's bunds and Japan's JGBs, have run up to multi-year highs.

Meanwhile, the real worry about the U.S. 10-year chart isn't just the pennant pattern, it comes when you zoom way out, to put it in a generational perspective.

Many chart watchers believe pennants tend to appear around the middle of a trend. So as if the pattern plays out as usual, chart watchers often present a "measured move" target, meaning they estimate the potential move by adding the length of the flagpole to the point of the breakout.

The 10-year chart shows the flagpole being about 4.5 percentage points in height. If that is added to the point of the breakout, which could be in the area of 4.60% in the coming week, the measured move target would be 9.1%.

If you calculate the length of the flagpole to the bottom pennant, as some technicians do, the upside target would be about 7.4%.

Either way, the outcome would be pretty scary, because as borrowing costs for companies rise, the costs for what they produce will also rise to make up the difference.

There is another potential scenario that could be scary in a different way.

While LaRose believes the risk in the short term is for higher rates, he said he's "not necessarily sold" on the notion that there's a decisive and explosive breakout to the upside.

He believes the 10-year Treasury yield could rise slightly, into the 5% to 5.5% range. But at that level, the economy could still be hurt enough that rates end up heading in the opposite direction.

Basically, be careful what you wish for.

"Market gets pushed to extremes, economic conditions deteriorate rapidly, as a result we get economic contraction," LaRose said. "We get turmoil, we get equity markets pulling back significantly, we get rates reduced significantly as a result."

-Tomi Kilgore

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05-19-26 1746ET