May marked an important month for U.S. markets this year. When investors learned of the Federal Reserve's intention to taper their bond buying, Treasury yields exploded higher. This caused many market participants and analysts to panic over what kind of effect this might have on the housing market and overall economy. Concern escalated until it reached a fever pitch in September, when the 10-year yield spiked briefly over 3%, and news outlets everywhere flooded the public with predictions of how much higher interest rates were about to go.
The milestone was short-lived, however, when the 10-year yield fell back below the 3% threshold the very same day, and has been slowly declining ever since. With rates reaching 2.5% just last week, and the Federal Reserve assuring investors that tapering of QE will not happen until next year, talk of higher interests rates has almost disappeared from investment circles. This complacency could be rattled again soon, though, if bonds are unable to rally past important resistance ahead.
Elliott Wave Theory and other traditional technical-analysis methods reveal a key region approaching in the iShares 20+ Year Treasury Bond ETF (TLT) , which tracks 20-plus-year Treasury bonds. This area of resistance could prove to be a significant decision point for long-term bond prices and interest rates. If TLT is unable to break above 113, then new lows into next year can be expected, which also means higher interest rates. It could also mean an end to a decades-long rally in bonds.
Confirming this possibility would require more than a new low in TLT, but it would be a move in the right direction. Identifying a turning point in a trend that has been ongoing since 1981 requires time, but the necessary path has been laid out. Seeing TLT stay below 113 on this current rally and make a new low afterward is the next step in this process.
In Elliott Wave analysis, the resistance region approaching is represented as wave iv of 3. This is illustrated in blue labels on the TLT chart linked to below. In order to confirm a change in trend, a full five waves need to complete off the high made in July of last year. The path of this process requires another corrective rally after the next low in TLT, followed by on final drop to finish the pattern.
Most important, however, is what happens in the next one to two months. TLT must turn back down between 109 and 113, and target roughly 99 afterward. If price breaks above 113, then the probability for a continuation of the rally in bonds increases dramatically. This possibility is illustrated by red labels on the TLT chart linked below, and could mean new all-time highs in the future.
I will be watching bonds and yields very closely this month, to see how the price pattern unfolds. Since the path that determines an important period for bonds has already been laid out, all that is needed is for price to follow it. The bond market is sensing what is coming down the road, and it is starting to show on the charts. If the entire five-wave pattern completes in the next year, then it will confirm a change in trend, and signal higher interest rates ahead for many years. This will have an important effect on all markets, and thus the investment community as a whole.
See chart illustrating the wave count on the TLT.
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