Related Topics
Interest Rates

Another 75 BPS Hike Roils Bonds? It's Not Why Treasury Yields Rose. And it Won't Tell You Where They're Headed Next

Nov. 3 saw Treasury Note prices slide to one-week lows; yields spiked. But the Fed's rate hike didn't cause either -- the Elliott wave pattern did.

by Nico Isaac
Updated: November 07, 2022

Last summer, I went on a beach trip with my girlfriends. We brought an entire library's worth of cheesy romance novels, gossip rags, and trivia magazines. My favorite was a July 27 Reader's Digest that included an article titled: "51 Favorite Facts You've Always Believed That Are Actually False." Among the most shocking were:

  • Adding salt to hot water does NOT cause it to boil faster. In fact, it can slow down the rate of heating
  • Dogs do NOT sweat by salivating. They sweat through their footpads
  • Goldfish have a 3-month long memory span; not a 3-second one. Sorry, Nemo!

The other 48 are just as shocking!

Now, what if I asked you, dear reader, about the validity of this long-held financial belief?

Central bank rate policies drive changes in bond markets.

Mainstream economic wisdom deems this as fact. Take, for instance the recent performance in the 10-year Treasury Notes. On November 3 at 9:03 AM, their prices slid to their lowest level in over a week. (Prices move inversely to yields and rose above 4.1%.)

Wall Street was quick to pin the move on the Fed's November 2 rate hike, it's fourth 75 basis point hike in as many months.

  • "Fed Continues Aggressive Tightening Campaign... [Making] it Clear that Yields Need to Go a Lot Higher" -- Nov. 2 Bloomberg
  • "10-year Treasury yield turns higher after Fed's Powell says rates will go higher than expected" -- Nov.3 CNBC
  • "U.S. yields shoot higher after Powell sets hawkish tone... Bond and equity markets immediately sold off on the hawkish stance and remained under pressure on Thursday." -- Nov. 3 Yahoo Finance

First, to say bond investors didn't expect the Fed's 75 BPS hike is like saying a parent is shocked when their 5-year-old wants to eat cookies instead of cauliflower for dinner. A bat could've seen it coming! (Fun fact: Bats are NOT blind, as I learned in that same Reader's Digest article.)

Second, the same exact "experts" claiming the Fed hike caused bond prices to fall and yields to rally one minute, flipped that script the next. Case in point, this November 3 Wall Street Journal headline:

Wall Street Journal Treasury Headlines Nov 2022

Perhaps if you had the memory span of a goldfish you would've forgotten that just hours earlier, the headlines said the exact opposite, i.e., Treasury yields RISE after rate hike.

Which leaves the door swinging wide open for a different interpretation of the Nov. 3 fall in 10-year note prices (and rise in yields). And it's where the Elliott Wave Principle steps in. From the definitive beginner's guide, Elliott Wave Principle -- Key to Market Behavior:

"The market has a law of its own. It is not propelled by news. At best, these news reports are the tardy recognition of forces that have already been at work for some time.

"Any time an analyst claims to be using 'fundamentals' for macroeconomic or financial forecasting, run, don't walk, to the nearest exit."

That includes the Federal Reserve's rate policies.

As for what does propel markets, the answer is investor psychology, which drives price patterns directly on market charts. These patterns are both repetitive and predictable. And, each pattern adheres to specific rules and guidelines which determine its length. This means you can identify just how large a new opportunity is likely to be.

For example: Within an impulse wave (a 5-wave move), wave 2 can never retrace more than 100% of wave 1.

This rule for wave 2 is directly relevant. On October 27, our Interest Rate Pro Service analyst Jim Martens showed this chart of 10-year T-Notes which identified a complete wave 1 rally. The next move would be a wave 2 decline, and as Jim explained, "sets the stage for a downturn" -- in prices; a spike in yields:

T-Notes 10 Yr CBT Combo CAdj Liq CBOT 60 minute bars 10-27-22

Applying the previous rule for wave 2 retracements, Jim provided critical support for his interpretation:

"A correction needs to end after three waves and no lower than 108^265."

Anything beyond that level would push wave 2 beyond the origin of wave 1 -- a rule violation. And, this next chart shows how the ensuing collapse in prices, and rise in yields, fit the wave 2 pattern:

T-Notes 10 Yr CBT Combo CAdj Liq CBOT 60 minute bars 11-3-22

Although not every Elliott wave forecast works out like this, the veterans of the method would look at this chart and have a strong idea about where 10-year T-Notes could be headed. What follows a wave 2 correction, I ask you?

For newbies, our Interest Rate Pro Service clearly defines the likely near-term trajectory in store for 10-year notes, along with every critical price level to help manage risk.

See below to learn more!

From 10-Year T-Notes to Eurodollars: Your Opportunity Awaits

Is there a way to survive the volatility in bond markets?

Yes. But even more than that, there's a way to thrive: Having an objective model for identifying and interpreting the near-, and long-term trends underway.

Our Interest Rate Pro Service publishes intraday, daily, weekly and monthly analysis of the world's leading forex pairs -- so you can experiment with the timeframe and market that suits you best.

Subscribe today!


Forget the Fed -- Watch the Waves

The Federal Reserve, and to a lesser degree the European Central Bank, have dominated the conversation about interest rates lately. But watch our Interest Rates Pro Service analyst Ivo Zhelev apply textbook Elliott waves to forecast the price of the UK's Long Gilt -- and, by extension, UK interest rates -- without a single glance at central bank statements.

Why a U.S. Recession May Foil Economists’ Expectations

A recent survey reveals positive expectations for the economy by a group of "professional forecasters." Learn why you may not want to bet the farm on that expectation. This chart compares leading economic indicators around the time of past recessions with what's going on now.

Gold Mining Stocks Lead Gold Lower: What’s “Fundamentals” Got to Do with It?

In mid-April, gold mining stocks led by VANECK GOLD MINERS ETF turned down from one-year highs to 3-month lows in May. Gold followed, reversing from all-time highs on May 4 to multi-month lows on May 25. We don't need another "fundamental" explanation for why.