The US BOND market has become the most important market on the Planet

It is my opinion that out of all the markets that the monetary officials are keenly interested in, some to the point of tinkering with constantly, no one market has become more important to them than the US Treasury market. Not even the Dollar has them as extremely on edge as the long bond in particular.

The reason for this is twofold. First of all, since the Fed is engaging in QE2, they cannot afford to allow the bond market to break down technically on the price charts. That would send a signal to every single hedge fund computer algorithm in existence to slam this market down sharply lower. The resultant rise in long term interest rates would choke off the economic "recovery" and would utterly and hopelessly short circuit the very reason for their massive purchases of Treasuries, purchases which I might add have resulted in their balance sheet holding more Treasury paper than the total reported holdings of China.

Second is the massive US federal debt level, a level which is looking increasingly like one associated with a banana republic. The cost of servicing the interest alone on this debt ratchets up with alarming rapidity with each and every tick higher in interest rates. As more and more new debt is issued, it then comes with a higher price tag for the federal government. A sinking bond market would compound this inescapable problem and add an entirely new dimension to the crisis.

That is what must keep monetary policy planners as well as fiscal policy planners awake at night and why so much attention is fixated on the bond market. It is also the reason that whenever any of the Fed governors sound a hawkish note on the US economy, Bernanke and the rest of the doves on the Board are so quick to counter. Their comments always serve to rescue the bond market from any potential sell offs.

Take a look at the following chart and note the nearly perfect correlation between the price action in the broader equity markets as illustrated by the S&P 500 chart and that of the long bond. The area within the rectangle is what I would like you to focus on. Note also the level of the S&P at its recent peak near 1340 and the level of the bond at that time, which had a 117 handle on it.

Now move to the right of the chart to see today's closing price on both. The S&P is a mere 14 points off its recent high and yet we see the bonds sitting with a handle of 121, fully 4 points higher than the last time we were anywhere near 1344 on the S&P.

Combine this print on the bonds with the fact that the Continuous Commodity Index  (  CCI ) put in an ALL TIME HIGH today with strength seen in the surging energy and precious metals markets, and one can see just how greatly the Federal Reserve has DISTORTED the interest rate markets in the US.

What they are attempting to do (and succeeding I might add) is to camoflauge or better yet, counterfeit, the message being generated by the bond market. They are duplicitly masking the inflationary results of their policy of QE.

I might add that if this were not fradulent enough, it also comes on the heels of a stunning downgrade of the US credit outlook by the ratings agency Standard and Poor. Imaging this even being possibly contemplated a decade ago!

In the face of a falling dollar, a US credit outlook downgrade, a surging stock market, and soaring commodity prices, the bond market, thanks to the interference by the Federal Reserve is telling us all that the only thing we need to fear is fear itself.

History is going to record this sham and I trust will not deal kindly with those who have perpetrated this fraud upon the American citizenry.

This will not end well.