The Bond [GSEC] Markets Inflection Point

The Bond [GSEC] Markets Inflection Point


  • 18 Mar 2020

Bulls you win, Bears I lose

This is an important data as we hit an inflection point in the broad market. This event is most likely to be global. A while back to US bond markets topped out, completing a 5 wave advance backed by risk off buying that drove bond yields to record lows not seen in decades. The chart shows a fall below the 3 decade channel lines in wave 5 and now a pullback to that channel. Yields may now rise for months but initially back to the wave 4 high near 2.4%

bonds 180320

While all this happened the Indian 10 year government securities saw their yields drop to 6%, a small blip below the 6.183 low made in November 2016 right after demonetisation.

Now it will only be fair for me to add that I have flipped once to consider the case for lower Bond yields. The triangle shown with blue lines on this chart still needs a properly confirmed breakdown to tell us where it's headed. In 2018 I was expecting the move to continue higher till 9 to 9.5% on the upside however yields truncated and started to fall. Since then I have tried to consider the idea that wave C down has started in which case we should see an impulsive decline. Based on the weekly wave count it does look like a 5 wave fall however the most recent dip has not yet completed 5 waves on daily charts even though we dropped to 6%.

tygsec 180320

This brings us to an inflection point in the Indian bond market. If yields do not fall any further then it would be an indication that the fall was corrective and wave (e) of a triangle just completed, with a final confirmation if we move above 6.49%. In this scenario the Indian bond market will succumb to the same pressure that we are now starting to see around the world. Bond yields are rising in the face of a rising dollar that has almost smashed most of the currencies in the last one month. The RBI has intervened in the INR market twice this week and announced a fresh round of LTROs that were responsible for breaking down bond yields in the last 2 months. Despite this the USDINR is rising and bond yields are above 6%. They have achieved lower the volatility in these markets relative to equities as of now.

For the decline in bond yields from 8.2% in September 2018, to become a 5 wave decline we would need at least one more debt below 6% in the next few days. If that happens then the next move up in bond yields would only be wave 2 of a longer term decline. In this case years would not go back to the 8% Mark and probably take out closer to 7.5% followed by another wave down in interest rates in India. This is the alternate that I discussed in the long short report which now requires a final wave of confirmation.

In the Original and Primary scenario shown on the chart above which I have maintained since 2010 wave C up in bond yields is likely to occur during India's economic deflation, pushing yields to 10% or higher in the coming 1 to 2 years. In this scenario the equity market crisis that is weighing on the currency market will eventually end up weighing on the bond market as well. This is already happening in markets around the world and there is no reason to believe that it would be any different in India. In short I was expecting this bump up in yields from the 2016 low but it might become an eventuality now. That bump up will probably clean up the system and sets stage for far lower interest rates than we have seen in a long time. The peak in yields will probably coincide with the end of India's economic bear market. Only later yields will drop again and go far below the 5% mark. That event maybe a couple of years away. But of course time is not a science so we will 1st need to track wave C up in 5 waves to determine the turning point. So unless we break below the 6% mark for the 10 yer GSEC we are headed back to 10%. Now I have said it again after long lets go over the manic global bond market charts

Let me start with Spain because I published this chart in Jan 2019. Then I noted that the fall from a triangle [typically a 4th wave] was the last decline in yields for Spain. Why choose Spain? Because unless you do not know it has the largest debt pile in the Eurozone after France. so we did get the low in yields then but it has taken a year long wait for wave 3 up to kick off. The bottom is in.

spain bonds

Let me then end with a front line country, Russia. One of the BRIC, and its been in crisis before every time there is a dollar run and Oil slips they take it on the chin. Now isn't that a fast move from 6% up. The top end at 16% was visited twice before during dollar crisis. Once more I hear? So clearly this is just the beginning of a bond market calamity.

russia 180320



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