A veteran bond trader explains the counterintuitive chart pattern behind his call
One day after the Treasury Department announced an accelerated buyback of long-term Treasury bonds, which reduced long-term yields, those bond yields were back up again.
Ten-year Treasury yields ticked higher again Thursday morning, gaining more than 5 basis points. This also follows the release of the Federal Open Market Committee (FOMC) meeting minutes on Wednesday, which indicated that there is a growing concern that the central bank may need to raise rates to help fight inflation.
While daily increases and decreases are often driven by the day’s news, there is a market theory that those moves are part of an overarching pattern that can guide analysts on where bond yields may eventually end up.
To at least one veteran bond trader, the fundamentals of that market theory appear alive and well in the current market today. The analyst behind this call is not an economist. He is a market technician who has spent decades reading charts rather than economic reports.
Billy Abrams (pictured top), who spent decades in institutional fixed income before moving into correspondent business development at AD Mortgage and taking the role of president and CEO of IF Securities, said what comes next, if the pattern holds, is a rally in Treasuries that could bring meaningful relief to mortgage rates before yields eventually resume a longer-term climb.
While the markets may be betting on the Fed to hold steady until December, Abrams said a surprise move by the Fed in September could be the catalyst the bond market needs.
"I personally think that if the Fed were to shock everybody and raise rates, I think the bond market would firm up," Abrams told Mortgage Professional America. "A more aggressive Fed claiming they're going to fight inflation would actually help the long end of the bond market."
Where the market may move
Abrams is a market technician, meaning he bases his calls on chart patterns rather than economic fundamentals. Right now, the pattern he sees plays out in three stages.
First, he thinks the 10-year yield will top out near 5%, give or take 15 basis points. The 30-year has already pushed through that level at 5.30% and is climbing, and he thinks 5.50% is a reasonable target for it.
"I think we're in the very late stages of what I call a B wave," he said. "I think we've seen 70% to 80% of the move, and I think we're moving towards the end of that cycle."
From near 5% on the 10-year, he expects a significant rally that would bring the 10-year back to the mid-3s. That rally could bring meaningful relief to mortgage rates.
"I think there's going to be a surprising rally, probably a rally that surprises most people," he said. "I don't have a good answer for why it would happen, but the charts tell me we're going to."
After that rally ends, his longer-term view is less optimistic. He expects a second major wave up in yields that eventually takes the 10-year to 7% or 8%, mirroring the scale of the first wave from near zero to 5%, though he said that outcome is not imminent.
"Pay me now or pay me later, but it's coming," he said.
The framework behind the forecast
Abrams said mortgage spreads to Treasuries should actually tighten in this environment, since mortgages pay monthly principal and interest that can be reinvested as rates rise, making them more attractive than long-term Treasuries with locked-up cash flows.
The framework Abrams uses is Elliott Wave theory, a method of reading markets based on repeating wave patterns. The theory describes markets as moving in impulse waves in the direction of the primary trend, followed by three-part corrections labeled A, B, and C.
Abrams said the 39-year bull market in bonds, from September 1981 when the 10-year yield peaked at 16.5% to the near-zero yields of 2020, fits the Elliott framework almost perfectly. From there, yields moved in what he calls the first impulse wave of a new bear market, up from near zero to roughly 5% on the 10-year by October 2023.
He believes the A and B wave followed, with a move into the mid-3s for long-term yields before a recent push into the low-5s.
"I believe the move from October of 2023 when we were at 5% into September of 2024 when we were in the low to mid-3s was the A wave," he said. "The move up in yield from September of 2024 to where we are now has all the earmarks of a B wave. There is nothing about it that is impulsive."
The reason a Fed hike could be the trigger connects to what Abrams calls Gann dates, a concept from WD Gann who believed anniversary dates of major market moves carry elevated significance. The lowest yields since October 2023 occurred on September 16 and 17 of 2024, and the upcoming FOMC decision will be announced on September 16.
He said CME FedWatch, the Chicago Mercantile Exchange's tool that tracks what Fed fund futures predict about upcoming rate decisions, is currently pricing a rate hike in December with no meaningful changes expected into next year. In his view, that reflects real money behind the call.
"The people with the big money don't disagree with the fact that the next move by the Fed is a rate hike," he said. "JP Morgan, Goldman Sachs, Morgan Stanley — they move the markets. If they thought the Fed fund futures were wrong, they'd make a play."
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
