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The Story Told By Treasury Yields: Deflation
As the year 2007 rolled into 2008, the mainstream financial experts were certain of one thing (if you don't count death and taxes): Inflation would take the U.S. economy by storm and prompt an across-the-board flight out of the rate-sensitive bond market (a rise in yields, a fall in price). The following news items tell all:
- "Inflation May Cause US Bond yields to spike… It's like the 70's when Ford addressed the nation with his 'Whip Inflation Now' speech… and 10-year yields soared." -- December 3, 2007 Bloomberg
- "We're in a period of a commodity bull market and inflation. I wouldn't buy government long bonds. We'll be going down for years to come. Commodities are telling you to sell treasuries. Inflation is everywhere." -- December 5, 2007 International Herald Tribune
- "Inflation is dead only if you have the luxury of not needing to drive anywhere, heat your home, or eat." -- January 30 CNN.com.
We at Elliott Wave International, on the other hand, begged to differ -- at precisely this time period.
While the usual pundits were hammering the last nail in the long-bond’s coffin, a year ago the January 2008 Elliott Wave Financial Forecast was gearing up for the market’s extraordinary rebirth. As the following chart from the January 2008 issue shows, our analysts foresaw that deflation -- not the widely anticipated inflation -- would drive the price of every asset class (including Treasury bond yields) -- DOWN.
Flash ahead ONE year later. The much expected-repeat of a 1970’s-like inflation never came. Quite the opposite: A deflationary collapse in all asset classes from corporate debt to commodities, retail to real estate, and manufacturing to the stock market. And, a nervous public flees into what they perceive to be the "last safe hiding place" – Treasuries.
To wit: In the final month of 2008, the yield on the 30-year T-bond plunged to an all-time historic low, while short-term Treasury yields fell into negative territory for the first time since the Great Depression. Here, the February 2009 Elliott Wave Financial Forecast presented the following updated version of the original chart you saw above.
In the end, one thing remains clear: While the usual suspects saw the Federal Reserve Re-flating the U.S. economy via bailouts and rate cuts -- the Treasury bond market foretold the deflationary story that has been unfolding over the past year.
As for today, the near-term pattern in 30-Year Treasury Bonds sends a strong signal as to how long the rally in the U.S. stock market could last. Get the complete picture today.