10-Year Treasury Yields Have “Broken Out” to a New Multi-Year High.  Will Yields Continue Higher?

Yesterday’s market jolt, according to the talking heads on financial propaganda TV was due to 10-year treasury yields “breaking out” above their Dec 2013 high.  I’m sure this slight new high invalidated a few Elliott Wave counts, and “confirmed” a few others.  However, EW invalidations rarely affect the ongoing Hurst roadmap right away, and a Hurst nominal model analysis of TNX starting in 1998 continues to suggest that there is a top in yields due quite soon, to be followed by downward movement in yields thru mid-2020.  The chart below is a Sentient Trader (Hurst Cycle) Analysis of TNX (10-yr yields index) starting July 1998.  It utilizes the Hurst nominal model and considers both peak and trough phasing. (Click on the charts to enlarge)

The next chart is my resulting long-term Elliott Wave count on TNX:

Of course, the first question from most market participants would be “Why?  Why wouldn’t yields keep moving the upside?  The Fed is raising rates, and we just saw a breakout.”  I rarely attempt to produce definitive fundamental answers to the big “Why?” question, because any answer is certain to be a guess, fueled by unproven theories, or directional bias.  For me, the markets must be approached without bias, and that’s why I base all directional forecasts on a system that utilizes multiple dissimilar methods of technical analysis.

Still, many market participants would never read blog posts if the “reason” for every market move was strictly technical every time, so here’s a few ideas about why yields could top soon, and start trending back to the downside:

  • There are many trend-following / breakout algos running in the financial markets these days. Whenever a new multi-year high occurs in a key item (like 10-yr yields), the overall market is immediately hit with a spurt of trading/volume/volatility.  In my experience, these spurts might propel a sustained breakout/trend but are just as likely to act as a stop-clearing exercise just prior to trend reversal.
  • Also prominent in the markets these days are “sentiment trading algorithms”.  I developed one myself.  Here’s a screenshot of it in action, on the ZB (30-yr T-Bonds) futures contract:

Many times, at the point of a slight new breakout high, large commercial traders are already heavily fading the move, while retail traders are already all-in long.  Historically, this sentiment spread is more likely to produce a trend reversal than it is to propel prices higher.  In the case of the ZB contract, which moves opposite yields, the current sentiment spread is suggesting that a tradeable bottom is near because commercials are heavily long, and retail is heavily short.

  • Bonds-up and yields-down would likely occur in a “flight-to-safety” market environment. After 9-years of up-up-up, it could be time for a larger stock market correction than 10%, which would proper yields back to the downside, as investors jump out of stocks into bonds.
  • If rates continue to rise, the real estate market would likely suffer, property prices could fall, and that wouldn’t be a good thing for the banks. Real estate is often used as collateral for bank loans.  The Fed, whose “job one” (in reality) is to protect the health and solvency of the banking system, cannot afford to tank the real-estate market (again).
  • While many pundits are currently claiming that bonds-down (yields-up) and a strengthening US Dollar go hand in hand, there’s no proof of a sustained correlation visible on the charts. The Bonds vs US$ chart below shows that the correlation between the two often shift from a positive to a negative (opposite) correlation.

To confirm the validity/timing of TNX/Hurst roadmap, I always compare it to an updated Hurst analysis on U.S. bonds using a longer data set, starting prior to the very important 1981 large-cycle trough.  That analysis is always covered in my weekly “Counts” webinars, as well as in the Sunday and Wednesday editions of EWP ScreenShots.  Please consider a subscription.  Thanks.

Sid Norris – ElliottWavePlus.com