“The tidal wave of risk assumption … may be turning”
By Elliott Wave International
On June 14, the yield on the 10-year U.S. Treasury note surpassed 3.45% — its highest level in more than 11 years.
Keep in mind that the lowest intraday reading for the yield on the 10-year note was 0.31% — and that was as recently as 2020. So the rise has been remarkable.
The Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets, was ahead of this trend reversal. Back in March 2020, the publication showed this graph of yields on global bonds, 10-year U.S. Treasury notes and general obligation municipal bonds. Here’s the commentary:
According to 150 years’ worth of data … this is the first time that 10-year Treasury note yields have dropped below 1%. Grand Supercycle-degree tops set Grand Supercycle records. Investor ebullience is the only thing that allows for an embrace of no-yield debt. The tidal wave of risk assumption, however, may be turning.
In other words: Expect the downward trend in yields to turn upward.
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Shortly after that March 2020 analysis in the Elliott Wave Financial Forecast published, yields began to climb.
As you might imagine, bond portfolios have taken a substantial hit (bond prices sink as yields climb).
Shifting to corporate bond portfolios, Bloomberg had this headline on March 14 of this year:
Corporate Bond Rout Is So Severe History Books Need a Revision
The article goes on to say:
[U.S. corporate bond] losses have piled so high that they now belong in history books. A Bloomberg index of investment-grade returns is down 10.5% so far this year … There is little precedent for drops of that magnitude.
Mind you, this was back in March and yields have risen since.
As a May 12 headline from the Associated Press said:
Bonds, haven for elderly and cautious, are getting torched
The question is: What does the Wave Principle say about this rising trend in bond yields?
If you need to brush up on your knowledge of the Wave Principle, an ideal book to read is Frost & Prechter’s Elliott Wave Principle: Key to Market. Here’s a quote from this Wall Street classic:
All waves may be categorized by relative size, or degree. The degree of a wave is determined by its size and position relative to component, adjacent and encompassing waves. Elliott named nine degrees of waves, from the smallest discernible on an hourly chart to the largest wave he could assume existed from the data then available. He chose the following terms for these degrees, from largest to smallest: Grand Supercycle, Supercycle, Cycle, Primary, Intermediate, Minor, Minute, Minuette, Subminuette. Cycle waves subdivide into Primary waves that subdivide into Intermediate waves that in turn subdivide into Minor waves, and so on. The specific terminology is not critical to the identification of degrees, although out of habit, today’s practitioners have become comfortable with Elliott’s nomenclature.
When labeling waves on a graph, some scheme is necessary to differentiate the degrees of waves in the market’s progression. We have standardized a sequence of labels involving numbers and letters … .
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