In early-October, 2023, we wrote that the 10-year US government bond yield was likely to peak around 5%, before heading down to 3%. This prediction was not based on some sophisticated interpretation of the plethora of macroeconomic factors shaping the Fed’s interest rate policy. We deem such attempts to be next to impossible. Instead, our analysis derived entirely from the chart below.
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The daily chart of the US10Y bond yield revealed that the recovery from as low as 0.3330% in March, 2020, could be seen as a complete five-wave impulse. The pattern was labeled 1-2-3-4-5, where the five sub-waves of wave 3 were marked (i)-(ii)-(iii)-(iv)-(v). Two lower degrees of the trend were visible within wave (iii) of 3, as well.
According to the Elliott Wave theory, every impulse is followed by a three-wave correction in the opposite direction. So instead of extrapolating the trend of the past three and a half years into the future, we thought that “once wave 5 is over, somewhere near the 5% mark, we can expect a bearish reversal to trigger a notable retracement back to the support around 3%.“
And indeed, the yield topped at 5.0210% that same month and then fell below 3.80% in late-December. A quick look at it today, however, reveals that it spent the next four months in recovery mode to as high as 4.7390% in April, 2024. Currently around 4.3360%, this seems like a good time for an update. The chart below shows that the big-picture negative outlook is still intact.
The chart drop to 3.7830% stands for wave A, which means that the following recovery should be wave B. In other words, the first two waves of the anticipated three-wave sequence are already in place. What remains is another notable decline in wave C. Natural downside targets in the support area between 3% and 2.5% make sense.
Despite its significant reduction over the past two years, inflation is still nowhere near the Fed’s 2% target. So the central bank is unlikely to voluntarily start cutting rates anytime soon. If the count above is correct, maybe it will be forced to do so by some yet-unknown unfavorable future economic developments. The US has been successfully avoiding recession for quite some time now, but we doubt it can do so indefinitely. For what it’s worth, the hourly chart below confirms that the recent recovery in the 10-year US bond yield is most likely over.
The rally from 3.7830% to 4.7390% can be seen as a (w)-(x)-(y) corrective combination between a flat correction in wave (w) and a simple zigzag in (y). The three sub-waves of each wave are labeled a)-b)-c) and the impulsive structures of c) of (w) and c) of (y) are visible, as well. We even have triangles in both waves iv of c).
More importantly, note that the decline from the top of wave B is also an impulse. If the analysis so far is correct, it must be wave 1 of C. A corrective rally in wave 2 is likely going to turn the recently-breached support line into resistance before the downtrend can resume. Recession or not, Elliott Wave analysis suggests that the 10-year US government bond yield is headed much lower in the second half of 2024.
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