SEC Wants to Tame Bond Markets. Fact Is, They’re Already “Tamed”

“Pain Trading” – that’s what some call the erratic performance in Treasury notes in 2022. But if bonds were the “pain,” Elliott wave analysis was the “pain killer.”

by Nico Isaac
Updated: September 13, 2022

When I was young child, I had a crippling fear of thunderstorms. Every gurgle and groan that echoed through the sky sent shivers down my spine. And with the first reverberating strike, I'd run straight into my parents' room and hide under their bed in tears.

Then one stormy night, my mom crawled under the bed with me. She told me if I counted to 5 between each thunderstrike, that meant the storm was 1 mile away from our house. As the seconds between each barreling bolt got longer, I could imagine the storm drifting further and further away from me.

This simple counting trick was so empowering. It enabled me to gain a sense of order over what I previously saw as a chaotic threat beyond my control. I still count the thunder bolts to this day!

Now what about financial market trends?

According to mainstream wisdom rooted in "fundamentals," markets move by the logic of "good" and "bad" news and events. For instance, a negative earnings report begets selloffs while strong growth begets rallies.

But time and again, prices go against this formula, thus reinforcing the idea that markets are random. That is another popular mainstream belief, by the way.

Frankly, that sounds scary. Like run and hide under your bed scary when market "x" crashes violently to the ground like a lightning bolt without warning.

In fact, that's exactly the sense we're getting from the most widely traded bond on planet Earth: the 10-year Treasury note. On March 24, Reuters coined a new phrase for the kind of volatile action that's gripped 10-year notes in 2022 -- "pain trading."

And, on September 14, the Securities and Exchange Commission will step in to propose new rules for trading Treasury markets. The hope: These reforms will restore order to an unusually chaotic market. On September 7, Reuters covered the SEC's multi-pronged plan:

"As Treasury debt continues to grow and Treasury dealers' market-making capacity remains limited, the Treasury market remains highly vulnerable to further dysfunction under stress, regulatory experts including former Treasury Secretary Tim Geithner warned in a report this year.

"With the Fed kicking off "quantitative tightening" in June, letting its Treasury bonds reach maturity without buying more, the market has experienced wild price swings.

"U.S. regulators have been working on reforms to the structure of the $23 trillion Treasury market following a number of liquidity crunches, including a meltdown in the market as the COVID-19 pandemic shut down the U.S. economy in March 2020."

There's just one problem with this plan; namely, the policymakers think bonds' "wild price swings" will be corrected by new rules and order. But the fact is, these markets have already been following the rules: the Elliott wave rules, that is.

We're talking patterns on price charts. Case in point, on June 22, our Interest Rate Pro Service showed this price chart of 10-year Treasury Note futures. The forecast was clear: price had completed a wave three impulse move within a larger, five-wave motive pattern.

This meant the stage was set to begin a rally in a wave four correction.

Wave four corrections are among the most recognizable corrective patterns because they often follow the guideline defined here in Elliott Wave Principle -- Key to Market Behavior:

"The primary guideline is that [wave four] corrections... tend to register their maximum retracement within the span of travel of the previous fourth wave of one lesser degree, most commonly near the level of its terminus."

On June 22, Interest Rate Pro Service used this guideline to anticipate how far the wave four move would go, writing:

"US Interest Rates: Has a Reversal Occurred?

"The three-wave advance from 114^10 is likely the beginning of wave 4... If correct, the market should continue moving sideways in the coming days. Fourth waves often find resistance in the area of the fourth wave of one lesser degree. In this case, wave (iv) ended at 120^20, so we should watch this level as potential resistance."

From there, the 10-year Note indeed rallied into the previous fourth wave span of travel -- in turn, on July 28, Interest Rate Pro Service warned that the move up was near the crucial retracement level. Our forecast for 10's was clear:

"The next segment of the rally should exceed 120^16, but it will bring the [move] that has been underway since mid-June to an end."

The chart above shows what followed: The 10-year Note established a top on August 2 and a bearish reversal followed. On August 2, Interest Rate Pro Service warned bond investors that "the poke to a new high likely marks the resumption of the larger decline... and start of wave 5."

And, this is what has transpired since: The fall in prices and rise in yields has followed their Elliott wave rules to the T-reasury!

Weather forecasters are notorious for telling us to bring an umbrella on a sunny day, and Elliott wave analysis is not perfect, either; no market-forecasting method is. But you can't deny the fact that there is a lot more order in the markets that are supposed to be "random," or moved strictly by the news.

When market gyrations seem out of control, investors get scared and the powers that be design rules and reforms to put price action in its place.

But just as I learned as a kid with thunder, sometimes you can count to "5" between the waves and know how far away the next potential opportunity is from striking.

Our Interest Rate Pro Service stands on its own for that very purpose.