“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)

"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Wednesday, March 14, 2012

Bond Collapse Continues

Much to the chagrin of the Federal Reserve, bond traders are taking that FOMC statement from yesterday and taking no prisoners as they literally hammer the long bond into submission. I find it a bit ironic (to be honest I am gleeful about it) that the Fed, which continues its attempts to manipulate hedge fund behavior by herding them into the equity markets, has opened an enormous can of worms and awakened the heretofore comatose bond vigilantes as an undesirable chain reaction to their "peachy" statement about the state of the US economy.

Bond traders are already moving the Fed Funds Futures to indicate interest rate hikes in early 2014, and not the latter part of 2014 as those minutes revealed yesterday. Worse, the yield on the Ten Year has spiked. It started off the week at 2.04% and ended today at 2.27%. As for the long bond, forgettaboutit; it was absolutely pummelled today now having dropped over 3 1/2 points the last two days.

What has happened is very simple - the happy talk about the US economy coming out of the FOMC minutes has traders jettisoning safe haven trades and even short term Treasuries in favor of the bull train leaving the station in the US equity markets. The problem? The last thing that the Fed and the US government needs or wants is a rising interest rate environment.

Oh sure, they can stand a bit of a move higher, but if any of this begins filtering into the mortgage market and the cost of home mortgages, autos, etc. begins moving higher, it will nip whatever nascent recovery there might be in the bud. And don't forget - there is that pesky "LITTLE" issue of the US national debt which will cost more federal tax revenue to service in a rising interest rate environment. Remember, even with its more upbeat assessment of the US economy yesterday, the FOMC certainly did not suggest that the recovery was robust or was it healthy. What they basically said, if I might paraphrase, was that it was showing modest improvement but was not out of the woods.

Doesn't matter - the bond market is focused on the "modest improvement" part and is interpreting that, either rightly or wrongly, that the Fed is not going to be doing any QE in the immediate future. After all, if things are supposedly so firmly on the right track, why the heck does anyone want to be in a "SAFE HAVEN" Treasury when everything is peachy keen, particularly if those paper IOU's are paying out squat.

The Fed has basically undercut it own low interest rate policy by giving investors the greenlight to sell bonds in order to deploy those funds into the equity markets. See what happens when you engineer a stock market rally?

I suspect that the Fed is going to be getting increasingly nervous if this sell off in the bonds, particularly the long end, continues unabated. Let's see how far the bond bears will push them.

By the way, I am not posting any gold or silver charts today as Eric King over at King World News, was gracious enough to interview me on both markets today asking about the technicals on the metals. You can find charts there with my usual annotations where support and resistance can be located. Here is the link to that particular interview:



  1. KWN quotes you as saying, “The Fed has reiterated, in yesterday’s FOMC statement, that they were going to keep interest rates near zero through 2014. This is why we are seeing so much paper selling of gold and silver."

    The first time the Fed said this, gold shot up. Negative real interest rates, more than anything else, are supposed to create a bull market in gold. I'm therefore puzzled by this analysis. It makes sense for gold to go from "risk on", coupled to the equities market, to "risk off", coupled to the bond market. But even in the face of negative interest rates?

  2. Greg;

    The way Eric put the quotes together it is a bit confusing. I have asked him to edit the quotes and put it the following way to make things clearer.

    Hope this helps - thanks for asking. Dan

    What you are seeing take place, at this immediate moment, is a rush out of the safe havens, the bonds and the gold market. Most of that money has been flowing into equities.... This is why we are seeing so much paper selling of gold and silver. Speculators are moving out of low-yielding Treasuries (cash) and into equities in the hopes of securing greater returns on their investment capital since they have been clearly told that the Fed intends to keep interest rates extraordinarily low for the foreseeable future. The name of the game is Chasing Yield once again (and not Safety). Since gold pays no yield and these speculators are convinced that the equity markets will, they are rushing back into stocks and out of cash and gold.

  3. The Fed is like a herdsman, herding a flock of sheep to go through the open gate that they think leads them to the fresh corn feed and nice warm haybeds to lay on. Instead, it's leading them right to the slaughterhouse. How long before the sheep realize they have been hoodwinked and start a stampeed for the door?

    The Fed is messing around with the long end of the curve, with precious metals, with quantitative easing, and with other things we don't know about. Is that what capitalism has come to? A managed society - similar to China - where the government guides the sheep where to go?

  4. Dan,

    You stated this on KWN: "Most of the commercial short positions were put on near the $1,800 level and they are all in the money. "

    How do you know this?


  5. Great analysis Dan. The bond chart displayed is very definitive longer term. The Ides of March are indeed here.

    Your buddy,
    Trader Garrett

  6. "Worse, the yield on the Ten Year has spiked. It started off the week at 2.04% and ended today at 2.27%."

    "The problem? The last thing that the Fed and the US government needs or wants is a rising interest rate environment."

    "there is that pesky "LITTLE" issue of the US national debt which will cost more federal tax revenue to service in a rising interest rate environment."

    "See what happens when you engineer a stock market rally? "

    Gold and Silver, a great time to buy.

  7. What if the ECB gave money to banks so that they can deleverage? Or at the very least get their leverage down AND THEN STAY DOWN. Even Mr Farage mentioned that the Germans and the Swiss seem to have their heads on their shoulders about the dangers of inflation. I can only restate the obvious to you American readers – in Europe it is the BOND market which counts – in America it is the stock market that people listen to, I am not so sure that American investors understand the importance of the bond market. Like so many things that we take for granted, America has become accustomed to the juice of low interest rates – while Europe is fumbling along with Much higher rates. And I can add that European gold is in central bank basements – out of sight and out of mind – but their bond markets are first and foremost on their minds. I would think that they, Bundesbank and SNB, are not amused by what is happening in America. Not only that, but when you count the trillions of dollars worth (nominal) of CDS – the vast majority of this is betting on interest rate moves. Bond vigilantes my ass – these guys are trying to save skin – their skin in the game.
    I could not find the reference, but I read on Mr Sinclair’s site that your mild winter released about 40 billion dollars into the economy. Please Trader Dan, it was the retail sales figure which has started this deluge in the bond market – not something Mr Bernanke said! We in Europe have had the most severe winter in more than 20 years. You undoubtedly saw footage of this. When I say severe, it was only severe for about three weeks – from February 2nd to the 19th. But unusually cold weather with a Siberian northeasterly wind of 20mph kept a lot of people on survival mode - not too much unlike our present gold market.
    And the US dollar - the safety of it? I particularly liked what Nassim Taleb said on Ron Paul’s site: that he has felt it his civic duty to come out in support of Mr Paul as being the ONLY candidate that has a coherent solution to what is ailing the American economy. Are you listening America? Shema Israel.


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