The 10-year US government bond yield was hovering around 3.75% when we first wrote about it in mid-February. Elliott Wave analysis led us to conclude that there was quite a good chance of it reaching the 5% mark. Fast-forward to October 3rd, with the yield already a full percentage point higher to 4.75%, we wrote that “somewhere near the 5% mark we can expect a bearish reversal.“
A mere twenty days later, on October 23rd, the US10Y bond yield peaked at 5.0210%. Earlier today, it dipped to 4.4280%, down nearly 60 basis points or 11.8% from last month’s record. Of course, even in a clear trend there are always movements against it. So, how do we know that this isn’t just another pullback on the way up? While nothing can be certain in any market, the Elliott Wave structure of this latest bond yield drop looks promising for the bears.
The decline from 5.0210% can already be seen as a complete five-wave impulse. We’ve labeled the pattern i)-ii)-iii)-iv)-v), where the five sub-waves of wave iii) are also visible and labeled i-ii-iii-iv-v. Yesterday’s sharp plunge following October’s CPI data fits into the position of wave v). It completes wave (i)/A and confirms the big-picture bearish reversal.
Impulses only develop in the direction in which the larger trend is going. An impulsive drop is telling us to expect even lower values in the 10Y bond yield in the not-so-distant future. On the other hand, the theory states that a three-wave correction follows every impulse. This means that a recovery to 4.70% – 4.80% makes sense, before the downtrend can resume in wave (iii)/C.