Bond market plummeting, price action signaling bottom may be near


Bond Market Highlights:

  • The 10s and 30s are tanking, with the long bond showing the most stress
  • The orderly decline is starting to look messy and at this point a bottom could be near

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We’ve seen the rising dollar turn into consolidation (it may break out, but for reasons to be discussed, it could soon fail), stocks have rebounded and are showing signs of stabilizing, but the bond market continues to fall. Hard. The sell off was orderly for the most part, but with the decline really getting worse, there are signs the market is capitulating.

So far this week, the selling has been the heaviest in a week since this lower leg began in early August, and is on course for the worst week since Covid hit. To me, this shows that the market is finally giving up and that’s a good thing to create a bottom.

I’m not an “Elliot wave man”, but when a clear trending sequence develops, I take notice. Since the sell off started after the peak of the capitulation surrounding Covid, by my calculations we have seen three impulse waves and two corrective ones. If so, then the capitulation episode we are seeing is consistent with the end of the third pulse and should soon bring a significant bottom that will last for some time.

I don’t think it will be the low in bonds, but marketable which leads to a corrective rally. A bottom in bonds would provide some rate relief and signal that the dollar is going to drop and stocks will rally a bit. Maybe in the new year.

The 4-hour chart of the 30-year ultra has a very clear trend structure, with the lower side of the channel having been broken since yesterday. This is where the order gets messy. We saw a sharp turn a month ago, shortly after the lower slope broke. This time we may see more of an extension ahead of a low if it is a larger low.

Tactically, buying bonds here is a bit like catching falling knives, but not the worse idea. However, it may be prudent to take a wait-and-see approach. If we are to see a low form in the medium term, it will be time later to establish a bet on lower returns. A sudden, sharp turn up will be the first signpost, then retaking that channel and exiting on the other side will add confirmation that a larger rally is underway.

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30-yr Ultra Bonds (UB1!) Weekly Chart

30-yr Ultra Bonds (UB1!) 4-hour chart

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—Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX

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