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SEC Wants to Tame Bond Markets. Fact Is, They’re Already “Tamed”

“Pain Trading” – that’s what some call the erratic performance in Treasury notes in 2022. But if bonds were the “pain,” Elliott wave analysis was the “pain killer.”

by Nico Isaac
Updated: September 13, 2022

When I was young child, I had a crippling fear of thunderstorms. Every gurgle and groan that echoed through the sky sent shivers down my spine. And with the first reverberating strike, I'd run straight into my parents' room and hide under their bed in tears.

Then one stormy night, my mom crawled under the bed with me. She told me if I counted to 5 between each thunderstrike, that meant the storm was 1 mile away from our house. As the seconds between each barreling bolt got longer, I could imagine the storm drifting further and further away from me.

This simple counting trick was so empowering. It enabled me to gain a sense of order over what I previously saw as a chaotic threat beyond my control. I still count the thunder bolts to this day!

Now what about financial market trends?

According to mainstream wisdom rooted in "fundamentals," markets move by the logic of "good" and "bad" news and events. For instance, a negative earnings report begets selloffs while strong growth begets rallies.

But time and again, prices go against this formula, thus reinforcing the idea that markets are random. That is another popular mainstream belief, by the way.

Frankly, that sounds scary. Like run and hide under your bed scary when market "x" crashes violently to the ground like a lightning bolt without warning.

In fact, that's exactly the sense we're getting from the most widely traded bond on planet Earth: the 10-year Treasury note. On March 24, Reuters coined a new phrase for the kind of volatile action that's gripped 10-year notes in 2022 -- "pain trading."


And, on September 14, the Securities and Exchange Commission will step in to propose new rules for trading Treasury markets. The hope: These reforms will restore order to an unusually chaotic market. On September 7, Reuters covered the SEC's multi-pronged plan:

"As Treasury debt continues to grow and Treasury dealers' market-making capacity remains limited, the Treasury market remains highly vulnerable to further dysfunction under stress, regulatory experts including former Treasury Secretary Tim Geithner warned in a report this year.

"With the Fed kicking off "quantitative tightening" in June, letting its Treasury bonds reach maturity without buying more, the market has experienced wild price swings.

"U.S. regulators have been working on reforms to the structure of the $23 trillion Treasury market following a number of liquidity crunches, including a meltdown in the market as the COVID-19 pandemic shut down the U.S. economy in March 2020."

There's just one problem with this plan; namely, the policymakers think bonds' "wild price swings" will be corrected by new rules and order. But the fact is, these markets have already been following the rules: the Elliott wave rules, that is.

We're talking patterns on price charts. Case in point, on June 22, our Interest Rate Pro Service showed this price chart of 10-year Treasury Note futures. The forecast was clear: price had completed a wave three impulse move within a larger, five-wave motive pattern.


This meant the stage was set to begin a rally in a wave four correction.

Wave four corrections are among the most recognizable corrective patterns because they often follow the guideline defined here in Elliott Wave Principle -- Key to Market Behavior:

"The primary guideline is that [wave four] corrections... tend to register their maximum retracement within the span of travel of the previous fourth wave of one lesser degree, most commonly near the level of its terminus."

On June 22, Interest Rate Pro Service used this guideline to anticipate how far the wave four move would go, writing:

"US Interest Rates: Has a Reversal Occurred?

"The three-wave advance from 114^10 is likely the beginning of wave 4... If correct, the market should continue moving sideways in the coming days. Fourth waves often find resistance in the area of the fourth wave of one lesser degree. In this case, wave (iv) ended at 120^20, so we should watch this level as potential resistance."

From there, the 10-year Note indeed rallied into the previous fourth wave span of travel -- in turn, on July 28, Interest Rate Pro Service warned that the move up was near the crucial retracement level. Our forecast for 10's was clear:

"The next segment of the rally should exceed 120^16, but it will bring the [move] that has been underway since mid-June to an end."


The chart above shows what followed: The 10-year Note established a top on August 2 and a bearish reversal followed. On August 2, Interest Rate Pro Service warned bond investors that "the poke to a new high likely marks the resumption of the larger decline... and start of wave 5."

And, this is what has transpired since: The fall in prices and rise in yields has followed their Elliott wave rules to the T-reasury!


Weather forecasters are notorious for telling us to bring an umbrella on a sunny day, and Elliott wave analysis is not perfect, either; no market-forecasting method is. But you can't deny the fact that there is a lot more order in the markets that are supposed to be "random," or moved strictly by the news.

When market gyrations seem out of control, investors get scared and the powers that be design rules and reforms to put price action in its place.

But just as I learned as a kid with thunder, sometimes you can count to "5" between the waves and know how far away the next potential opportunity is from striking.

Our Interest Rate Pro Service stands on its own for that very purpose.

From 10-Year T-Notes to Eurodollars: Your Opportunity Awaits

Is there a way to survive the volatility in bond markets?

Yes. But even more than that, there's a way to thrive: Having an objective model for identifying and interpreting the near-, and long-term trends underway.

Our Interest Rate Pro Service publishes intraday, daily, weekly and monthly analysis of the world's leading forex pairs -- so you can experiment with the timeframe and market that suits you best.

Subscribe today!

4 ways EWI's Interest Rates Pro Service lets you trade with more confidence

1. If It's an Important Bond Market, You'll Be Ahead of It.

Markets covered -- U.S: Treasury Bonds, 10-Year Notes, 5-Year Notes, Eurodollars, ETFs.
Global: Bund, Bobl, Gilt, Australian 10-Year, Euribor, Schatze.

Your Interest Rates Pro Service subscription puts a veteran fixed income market Elliott expert in your corner. His or her goal is to make sure that day-by-day, hour-by-hour, you see the very latest wave picture. You get intensive intraday coverage, to help you catch near-term opportunities, and daily forecasts that put you in front of longer-term waves.

2. You’re Ready for Probabilities with Insightful Videos

Once a week, your interest rates analysts record a video to break down the week's action and help you see what's most important about what’s next. You'll not only get their Elliott wave analysis and outlook in detail, you'll also get alternate scenarios and veteran insights to help you better understand the nuances of each fixed income instrument. Result: You’ll see what’s most likely to come next, so you can be ready to act on probabilities.

3. You Get Essential Weekly Perspective

With Elliott, context can be key. Your Interest Rates Pro Service subscription gives you bigger-picture analysis to help you ride – or at least consider -- major trends – trends that can last years. This essential perspective puts near-term moves into context. Together, you get a comprehensive Elliott wave picture for the bonds markets at every tradable degree of trend. Then, each week market veteran Murray Gunn posts his Interest Rates Insights column calling your attention to an over-looked but powerful wave-generated undercurrent moving the money markets. These columns all roll up to unparalleled, essential perspective for any serious bond trader.

4. You Become Part of an Exclusive Community of Savvy Elliott Wave Traders

We're on your side and working for you. If you have a question about the Wave Principle or our analysis, just send us an email. We'll update the next post or video so you and your fellow subscribers get the clarity you need.

Or, if you're having a hard time grasping an Elliott wave concept, often we can suggest a resource for you to read or watch.

We know we're successful when you understand the Wave Principle and our analysis. We'll do what we can to make sure that happens.

Note that we do not provide individualized services, assistance or advice concerning investing or trading in any way.

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