Bond, Germany's Bond Yield. No Time to Fly... And Yet Fly is What It Did!
From record low to 13-year high, the 10-year German bund yield defies its mainstream "plotline." Cue the opening credits.
by Nico Isaac
Updated: January 06, 2023
In October 2021, the who-can-count-that-high installment of the 55-year-old James Bond film franchise debuted. "No Time to Die" raked in $113 million in its international opening weekend to become the biggest-grossing post-pandemic movie.
At the exact same time, a very different "bond" was shattering its own international records: bond, Germany's 10-year Bond (known as "bund"), which saw its yield swimming with the fishes in negative territory since May 2019. In fact, Q3 2021 saw more than a fifth of the debt issued by governments and companies around the world (a total of $14.8 Trillion) trading with negative yields. (Sept. 26, 2021 Financial Times).
And much like James Bond in the opening scene of "No Time to Die," the yield on the 10-year bund looked to be deeply entrenched in a new, tranquil normal of early retirement, lounging languidly on a beach sipping umbrella cocktails in the hot sun.
Moreover, according to mainstream analysis, despite hints of inflation and mounting hawkish central bank rhetoric, the "fundamental" plotline for low yields was set. Signs of stagflation, recession, and an uncertain post-pandemic future conspired to keep the demand for fixed income assets high; thus, it was No Time for yields in Europe's most important financial instrument to Fly.
On December 21, 2021, Bloomberg iterated the popular view:
"Anyone gearing up for bond yields to surge in 2022 should think again. A global glut of saved cash has the potential to restrain an increase in rates, even as central banks dial back their pandemic stimulus.
"The strength of demand for bonds even in the face of deeply negative real returns underpins the broad consensus that 2% may act as a ceiling for U.S. 10-year yields in the coming year...But strategists expect the advance to be gradual and top out in negative territory on an inflation-adjusted basis."
But then, as this chart shows, just like Bond answering the call to come out of retirement, the 10-year bund yield sprang up from its 3-year long slumber, embarking on a year-long advance to its highest level in over a decade on December 30, 2022.
In turn, the usual blinders of conventional market wisdom -- namely, the physics of a "trend in play will stay in play unless acted upon by some outside force" -- disqualified them from anticipating one of the most dramatic sea changes of 2022 for Europe's leading economy.
But this change wasn't impossible to predict. Not by a long shot.
In our November 2021 Global Market Perspective, we published a special section on European bonds, including this chart of the German Bund's 10-year yield. Investor psychology had reached an extreme. And our analysis warned that the time for negative yields was coming to a close:
"What's yield got to do, got to do with it?
"As the chart below shows, the German 10-year Bund yield kissed goodbye to its multi-year downtrend channel and is now close to breaking back above zero. Be prepared for big headlines should that occur.
"Conventional analysts will argue that the rise in bond yields is because of surging consumer price inflation which, if it continues, will continue to weigh on fixed income markets and thus bonds would still be an unattractive investment.
"The more likely scenario is that, as bond yields rise, money will start to trickle from stock markets back into fixed income. The next few months are set up to be pivotal in the grand scheme of things in financial markets."
In mid-January, yields penetrated the zero line for the first time since 2019. By April of last year, the Elliott wave path forward had made itself known.
In the April 2022 Global Market Perspective, we showed this chart of the German Bond 10-year yield, which paved the bullish way for a powerful move higher in wave 3 toward 183 bps.
From there, yields soared to a high of 193 bps in late June. The July 2022 Global Market Perspective called for a "correction in wave (4) to continue throughout July."
A move down followed. Then, the August Global Market Perspective warned that "the downside is limited." Yields hit bottom post haste and resumed the upside. From there, a volatile period saw yields swing up-down-up-down until year's end. As this final chart shows, our Global Market Perspective was there, navigating the way at many notable turning points.
What makes a Bond movie so popular is its suspense; never knowing at each scene where the plotline will take the main characters.
But in the world of bond markets, the goal is to know where the plot is headed in advance. For that, our Global Market Perspective doesn't always get it right, but it certainly provides the most comprehensive long-term Elliott wave analysis of the world's leading interest rates markets that we know of.
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