Monetary policy was loose enough even before the pandemic, ever since the Great Recession of 2008. But the printing presses didn’t really go into overdrive until Covid-19 struck in 2020 and the US government decided to further support the economy with trillions of dollars. Now, we agree that the most vulnerable members of society had to be supported in those difficult times. Many others, however, did not have to.
If you go out and spend your financial aid checks on, say, jewelry, it means you didn’t need aid to begin with. According to Pandora A/S, for example, that’s precisely what went on in 2021 and the first half of 2022. So what happens when you give a lot of money to a lot of people who don’t actually need it? Well, they go out and splurge it on the first thing that caught their eye. The end-result should by now be well-known to anyone who wasn’t living in a cave the past two years: inflation.
The Federal Reserve first overreacted to the pandemic and then dragged its feet in responding to the rise in consumer prices. In less than two years, US inflation surged from under 2% to over 9%. This forced the central bank to go into damage control mode. But the Fed only sets short-term rates. The interest on long-term bonds is subject to market forces. This makes us curious to examine the 10-year government bond yield from an Elliott Wave perspective.
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The US10Y bond yield fell to 0.3330% in March, 2020. Less than three years later now, it is hovering above 3.70%. This is a very sharp and fast increase in interest rates, which has historically been followed by a recession. If we forget about the two consecutive quarterly GDP declines at the start of 2022, a recession has so far not occurred.
The interesting part is that the yield on the US10Y bond seems to be forming an Elliott Wave structure. It looks like an incomplete five-wave impulse, labeled 1-2-3-4-5. Wave (3) is the extended one and its five sub-waves are also visible. If this count is correct, we can expect a couple of rallies in waves (v) of 3 and 5, interrupted by a wave 4 dip in between.
Fifth waves usually exceed the end of the corresponding third wave. So if wave (v) exceeds the top of wave (iii) and then wave 5 exceeds the top of wave 3, we arrive at bullish targets in the 5% area. Once there, however, the impulse pattern would be complete and it would be time for a notable three-wave correction. A drop back to roughly 2.50% for the US10Y bond yield should not be a surprise.
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