On Wednesday the CBOE 10-Year Treasury Note Interest Rate Index ($TNX) definitively breached the lower bound of the range that had effectively contained trading since February. In Thursday’s session, a continuation of the strong bid for government debt was likewise evident, as 10-year Treasury yields were down more than 4 bps on the day. This recent action catapulted bonds back above stocks on the basis of year-to-date appreciation (consistent with our contrarian call coming into 2014). Exhibit 1 illustrates the price path so far in 2014 of the iShares Core Total US Bond Market ETF ($AGG) in the upper pane, and AGG’s performance relative to that of the SPDR S&P 500 Trust ETF ($SPY) in the lower pane—when the relative performance series sits above the dotted line at 100, as is currently the case (albeit by a slim margin), bonds are outperforming year-to-date.
This week’s breakdown in yields signals that the next wave down for yields has commenced. Per the following tweet, I adjusted my Elliott wave count for $TNX in late-January to consider the potential that the December peak in yields represented a top of longer-term significance. This modification was largely driven by the convergence of medium and long-term, relative performance-based momentum signals that suggested that an inflection in the uptrend for rates was due.
A minimum expectation for the consideration that a meaningful peak for government bond yields had been made was for $TNX to retreat back to 2.47%, the nadir of the one-degree lower Elliott Wave Theory fourth wave. Of interest, Thursday’s low low in $TNX: 2.473. In addition to price action though, I have observed anecdotal indications that also support of this outlook. Accordingly, in the chart immediately below, the wave circle v label has been upgraded from gray, as is reflected in the January tweet, to black to reflect a higher level of conviction that the year-end 2013 plateau marked the completion of the five wave advance from the low of July 2012. The chart also identifies nearby supports, including the 2.35 ballpark, which is where the April/May drop would be equal in magnitude to the January skid.
It must be noted though that daily momentum looks to be within a few days of bottoming, and so we may be reasonably close to a point from which yields might bounce. I do not have a strong view that such a bounce will prove anything more than a short-term affair though, as weekly momentum is positioned so that it might decline into the summer. Coincidentally, a decline in rates that endures into the June or August time frame would sport a (38.2%/50.0%) Fibonacci relationship with the length of the 2012-2013 rally—a minor support for the idea that bonds rally of 2014 has months of life yet remaining.
In conclusion, after sloshing sideways for three months, rates seem to have commenced the next leg of the move lower. While a relief rally might be due within the next couple of days, more weakness appears probable thereafter, perhaps into summer.