What I am referring to is the long awaited and long expected, I might add, breakdown in the US long bond. It is my opinion that the US bond market is the single most important market on the planet. For years, many of us have sat and watched as bond prices were driven to levels that very few thought imaginable a decade ago. What with the rush into the perceived "safety" of US Treasury debt and the concerted effort by the Federal Reserve to drive down long term yield through their Quantitative Easing programs, bond bears were blasted from one defensive position after another by the steady influx of money flows.
My oh my how things have changed over the last few weeks! I give you a weekly chart of the long bond where you can see the breakdown in vivid terms. With the advantage that comes from some hindsight now that enough time has passed to trace out a definitive chart pattern, we can see the peak in the bond market, and the low in long term interest rates has come and gone. Do you see that MAJOR TOP that form over the course of most of last year? Three times the bonds were shoved into that region and three times they failed there. The third time turned out not to be a charm and out went speculative money to giddily chase equities as this bond bubble burst and the new one formed in equities.
Once the major support level gave way near the 145 level, a countertrend rally developed that took bond prices through NINE handles before speculators could see that the final rally to retest the former peak could not muster enough strength to move the final 4 handles needed to reach it. Down she went and up went long term interest rates as a result.
I want to point out something on this chart that is more a function of the rolling process that occurs in the futures markets but nonetheless leaves it mark upon the technical price charts. This week the front month bond contract became the September bonds. Prior to this changeover it was the June bonds. There is currently a FULL ONE POINT DIFFERENCE between the value of those two contract months. When a continuous contract is drawn out for analysis purposes, the data it will include always contains the FRONT MONTH contract or the most active. That has now become the September Bond contract. When this is included, you can see the impact on the technical price chart!
Note how the support level that formed where the counter trend rally began, has now given way because of the level at which the September bond contract is currently trading.
The day is not over yet and thus neither is the week, but barring a late session upside movement in the bond market, it is now on track to close below what has been a significant chart support level. If it does so, odds favor a furthering of the new trend to the downside with no significant chart support showing up until another 3 - 31/2 points lower down near the 136 region.(Maybe the boyz at the Fed will send their New York desk buyer to the market to buy some bonds later today....)
One has to wonder if this is what the Fed had in mind when they were attempting to push long term interest rates lower. What they got was a mad rush out of bonds and fixed income in a near ZERO interest rate environment and into equities. All that money flowing out of bonds in search of easy gains in equities has now resulted in a surge higher in interest rates at the back end of the curve.
It is no secret that the formula for the current "recovery" has been ultra low interest rates which have made debt servicing easier for business, consumers and the government I might add. The big question is whether or not this nascent recovery can stand a rise in interest rates. I do not believe that it can. So where does that leave the Fed?
Talk of tapering QE makes investors nervous and actually undercuts any reason to buy bonds since a major buyer has been removed if that were to occur. That engenders selling. On the other hand, if the Fed were to actually reverse course and RAMP UP bond buying once again if the economy were to slow, then all that would do is to further facilitate the bubble in the equity markets that they have created. Money flows would continue to exit bonds and find a home in equities. Either way, bonds suffer as a result and head lower.
Talk about a self-inflicted conundrum! Good luck with this one fellas... You made it; now handle it!
Dan - thx for your comments. Worth watching indeed.
ReplyDeleteTake a look at the March 2012 lows on TLT.
ReplyDeleteThat looked like a "technical breakdown" and the Fed immediately stepped in and saved it with some type of "Jawbone" message, which resulted in a Doug Noland-style "Rip Your Face Off Rally".
We are still some distance away from breaking those lows, even though we are already lower than the March 2013 lows.
Would not surprise me if the Fed is letting the bonds go at this point to wait patiently for the shorts to really pile on, then some type of a joint "Pie-Hole" statement will be unleashed on a Sunday night from Kuroda, Bernanke, Draghi about renewed and accelerated bond buying.
That should happen in a few weeks, and will be timed precisely with Nenner's expected mid-June low in the gold market.
Afterwards, don't be surprised to see a vicious meltup in gold, stocks, and bonds, all at the same time.
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ReplyDeleteDan, excellent observations, for example:
ReplyDelete"What I am referring to is the long awaited and long expected, I might add, breakdown in the US long bond. It is my opinion that the US bond market is the single most important market on the planet...
Talk of tapering QE makes investors nervous and actually undercuts any reason to buy bonds since a major buyer has been removed if that were to occur. That engenders selling. On the other hand, if the Fed were to actually reverse course and RAMP UP bond buying once again if the economy were to slow, then all that would do is to further facilitate the bubble in the equity markets that they have created. Money flows would continue to exit bonds and find a home in equities. Either way, bonds suffer as a result and head lower."
I've been watching how more "commodities" are being added to the financial products menu to be securitized, collateralized, swapped and leased on more exchanges and trading platforms in a sort of deriversity.
Many overlook the resource wars including water in places like the ME, and underestimate how dams, depletion and industrial intrusion such as fracking enter as variables.
Keep up the good work!
If the FOMC was worried about rising interest rates, they would not have paraded out all those FOMC members who've been telling everyone QE could be tapered down soon.
ReplyDeleteAs for its effect on the economy, notice also the USD is rising. This increases consumer purchasing power. It's a wash. Rising interest rates also will help savers. How is that bad?
Nice bid in the mining stocks at the close while every other stock was getting creamed.
ReplyDeleteEither margin calls are rolling in on leveraged portfolios who have been gunning munis, dividend stocks, MLP's, etc. and those portfolios are also financed by being short mining equities...
Or, the mining stocks are sniffing out a "surprise" announcement by the Fed on Monday to stem the fixed income bleeding and arrest the sudden selling in stocks.
Like QE No. 5??
the arrogance of "policy makers" in believing that they are better able to establish the cost of capital than the collective bid and offer of every individual participant in our economy is beyond words. perhaps the bond market is now expressing adam smith's invisible hand with a slap in the face to those same "policy makers", or better, a punch in the mouth
ReplyDeleteRising treasury yields will prick the junk bond and stock bubbles and, paradoxically, send treasury yields right back down.
ReplyDelete@ Power Corrupts
ReplyDeleteLOL, "slap in the face to those same "policy makers", or better, a punch in the mouth" <-- so true.