Bond Market update

The long bond has been the beneficiary of safe haven flows over the last few days which from a technical perspective has greatly altered its once decidedly bearish price chart.

This market, which had been held together from the month of December to very early in February by Federal Reserve purchases related to its QE program, broke down sharply earlier this month turning and appeared to be on course to ending a trending move to the downside.

That began to change last week once the market was able to push back into the former congestion zone although it lacked the ability to actually manage a close within that zone. Once the unrest in the middle East began flaring further and crude oil rocketed higher, the bonds staged a huge rally easily penetrating into the zone today pushing towards the level that had effectively contained price for those 7 weeks.

Whether it was the poor auction results of today or whether it was the fact that the rally had made bonds too expensive for the lower yields, they are clearly hesitating at today's peak.

It will be up to the bond bulls to take price convincingly through the upper level near the 121^28 region if they are to make this anything more than a return to another trading range. Failure to do so will more than likely see the bonds retrace a decent portion of this week's gains and then test whether or not we are back to the consolidation pattern once again.

While commodity prices continue their surge higher, this time led by the energy sector, which I might add, I have been commenting on for some time as being the laggard of the sector, one would think that the spectre of inflation would be resulting in a wholesale reguritating of bonds particular at the rate at which the Federal government is cranking them out. So far that has not been the case as the current mentality in the bond pit is more short-sighted and is looking at the spike in crude oil prices and the rest of the liquid energies as a type of tax on the entire economy which will slow down economic growth. I think this is absolutely correct for the short term.

Higher energy costs will impact everyone, regardless of whether individuals or business owners. Profits will suffer unless this cost increase can be passed on to end users and consumers. If businesses are fearful of passing the costs on out of concern with maintaining their customer base, how can they increase hiring if their profits are not growing? The answer is self-evident - they cannot. No hiring - fewer jobs - slower growth - this is what the bonds are currently thinking.

One has to wonder however if at some point they must pass on the increase in costs in order to remain viable. Whether it becomes another fuel surcharge or whatever, if crude oil prices do not retreat, it will certainly occur. Then we get the inevitable cost push inflation that so many of us fear is coming.

First it was food and industrial metals; now it is energy. What else is left? Maybe we could all give up our automobiles and trucks and get horses but they have to be fed and grain is out of sight for those who do not have plenty of pasture land available!  Walking is an option I suppose but as the Dollar shrinks in value, the cost of those imported sneakers starts rising as well.