In the years following the economic reopening after COVID-19, U.S. Treasury yields surged as inflation spiked significantly.

Central banks responded with a hawkish stance, raising interest rates markedly to combat the rising inflation. As 2023 drew to a close, inflation began to ease, albeit not to the target levels. Speculation arose that the Federal Reserve might halt rate hikes, and there was even talk of potential rate cuts within the year. This sentiment fueled a bearish reversal in the 10-year U.S. Treasury yields, which retraced to 4% after peaking at 5% in October 2023.

From an Elliott Wave perspective, the sharp downturn in the final months of 2023 seems assertive, hinting that the market may have reached a temporary zenith and perhaps concluded a five-wave bullish pattern. According to Elliott Wave principles, such a pattern typically precedes a three-wave corrective phase. This suggests that the current retreat from the 5% level is an ongoing corrective process, indicating a potential further decline into a wave C within this year. This scenario seems plausible, especially if the Federal Reserve indeed moves toward rate cuts, potentially already by summer of 2024, as cuts in March are most likely off the table for now.

If my analysis proves correct, a decline in U.S. yields to 3% would likely lead to a weaker U.S. dollar, assuming that the reason for cuts is because inflation comes back to 2% target. But if rate cuts would be because of »recession« rather than inflation then intermarket analysis and correlations will be different compared to current one.

dxy vs ust yield

Trade well,

Grega

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Grega Horvat