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Bond Yields Rising Now; Consider How Far They Rose in 1981
History teaches harsh lessons about bonds

By Bob Stokes
Thu, 25 Jul 2013 17:45:00 ET
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The climb in bond yields since May of this year has been particularly sharp. On July 5, the yield on 10-year Treasuries hit 2.73%. But yields may have only started their ascent. 

Recent results from the July 24 auction of U.S. Treasuries show a continued trend of weak demand. MarketWatch reported that the “10-year Treasury note yield, which moves inversely to price, closed 8 basis points higher at 2.585%, its second day of gains and the highest level in almost two weeks." (Marketwatch, July 24)
 
Interestingly, the ultimate bottom in yields occurred one year ago at an all-time record low of 1.39% on July 24, 2012. And only two months before then, The Elliott Wave Theorist and The Elliott Wave Financial Forecast predicted that bond yields were set to rise in a June 6, 2012, Special Report on bonds.
 
In a nutshell, we think that the economy is profoundly unhealthy and that when that trend accelerates, investors’ waxing fears will cause them to start selling bonds, which will lead to even lower bond prices and higher yields.
 
Elliott Wave International believes that there is a historic precedent for expecting bond yields to climb much higher. As the Special Report on bonds noted:
 
[The first chart below] shows the history of the Bond Buyer index of 40 corporate bonds during the Great Depression. [The second chart] shows the history of its modern equivalent, the Bond Buyer 20-bond index. Bond prices today seem poised to do what their predecessors did: plunge.
 
 
 
In early 1932, prices on these bonds fell below — and rates rose above — those registered at the preceding peak rate of inflation in 1920. This is a good reason to expect interest rates on these bonds in coming years to rise above those of 1981, i.e. above 16%.
 
Theorist and Financial Forecast, Special Report on bonds, June 2012  
 
The July 2013 Elliott Wave Financial Forecast says that the “rate rises and price declines are contributing to a liquidity problem that should reach epic proportion in the next phase of decline.”
 



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