Bond Market – Weekly Analysis

CANDLES & TA:

Apparently, the strong oversold conditions I highlighted in the monthly report were a real threat. This week was a heck of a move. After technically confirming a top on the monthly scale, the 10Y rates challenged that decision and now have solid odds of turning the February tactical Tower Top into an even stronger bottom. If the panic (yes, the candles are panicking) is not contained, the monthly could form a Bullish Engulfing and the quarterly could end a 1.5-year-long bullish consolidation.

The rates remain bullish until signaled otherwise.

The following key paragraphs are from the previous analyses, and I keep them for a long-term reference:

From the April 2024 monthly: “The yield ended in April with strong bullish candles across multiple frames and long and very long term odds remain bullish. The monthly frame recorded a 50/200 MMA “golden” cross at the beginning of May. It did not happen for 72 years. After it was recorded last time in 1952, the rates rallied for 30 years and reached 15.82% in 1981.” The cross expanded wider in May and we have no reasons for considering a reversal in this department.

I’d like to remind that in 2023, US10Y recorded several very long term signals, such as 8/20 EMA crosses on the quarterly and semiannual frames, which are extremely rare. For example, the quarterly 8/20 EMA cross last time happened in 1955. Following the cross, there were 26 years of rate increases from 2.7% to 15.8%.

RATE of GROWTH
(initially discussed on February 9, 2023)

In 2023, I discussed certain events and compared them to similar occurrences in the 1950s, noting that everything seems to be happening faster in the bond market this time around. The pace is markedly different, and I continue to maintain this hypothesis.

Looking at the annual candles, it’s evident that the current sets and the rate of growth are far more agile compared to the mid-20th century.

From 1940 to 1950, it took 18 years for the 10-year yield to climb from the bottom to 4.5%. This time, that same rate was achieved in just 4 years—a pace 4.5 times faster. If this trajectory continues, we could witness a strong acceleration in the coming years, potentially completing the current cycle by 2029-2030. It’s certainly something to keep in mind.

ELLIOTT WAVES

Very Long Term

On a very large scale, the U.S. 10-year yield (US10Y) appears to have completed its first impulsive wave off the 2020 lows and is now developing wave ii, potentially signaling proximity to a bottom.

Notably, this long-term chart has remained unchanged since December 2022—over three years—underscoring the stability of the broader structure and reinforcing the long-term outlook.

Long Term

No changes to the outlook for wave (2). The recent downward move could still evolve into a prolonged Ending Diagonal for wave c of (2), shown in blue. The March close is becoming pivotal.

Spread 10Y-2Y
No change in this section.

The 10Y–2Y spread closed February with a bearish candle, potentially marking the top of wave 3. The yield curve pulled back, signaling relatively stronger demand for shorter-dated yields. The bond market may be entering a period of uncertainty, which could correlate with elevated volatility in the equity market.

Canadian CA05Y

Compared to the US10Y counterpart, the Canadian 5-year yield is even more “spooked.” The monthly candle is already an Inside Up, an equivalent of a Bullish Engulfing. A close like this could significantly reduce the odds of a potential lower low shown as an Alt 2/B. I am really curious what the Bank of Canada has to say on March 18.

SUMMARY

The bond market was shaken this week as yields reversed sharply from oversold conditions highlighted in the monthly report. The move suggests that the recent decline in rates may have been tactical rather than structural. Technically, the backdrop is shifting toward higher yields again, with the March close becoming an important signal for whether the broader bullish trend in rates resumes.

One of the potential drivers behind this shift is the sudden strength in commodities, particularly oil. With crude prices surging rapidly since the December bottom, the market may be beginning to price in renewed inflationary pressure. If energy continues to rally and supply risks persist, inflation expectations could rise again, pushing bond yields higher and challenging the recent disinflation narrative.

Overall, the bond market appears to be at an inflection point. If the current momentum in yields continues, it could mark the beginning of a new upward leg driven by inflation concerns, commodity strength, and tightening financial conditions.

From the previous analyses:

In 2024 and 2023, US10Y recorded several strong technical events that hadn’t occurred for decades, making it very difficult to reverse these trends. This suggests that higher rates are almost guaranteed in the coming years.

US10Y is also close to recording another significant event—a cross above the 100 annual moving average (MA) resistance line. This has not yet happened, and we are closely monitoring it, though it will require a lot of patience.

I would like to reiterate (as discussed earlier) that a prolonged period of higher rates is not necessarily damaging for markets. If we look at the period from the 1950s to the 1980s, a time of increasing rates, the markets grew on average 6-7% per year. We might see a similar trend in the coming years.