"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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Friday, July 5, 2013

Long Bond Chart Breakdown Continues

The multi-decade bull market in US bonds is clearly over and with it comes an entirely new set of issues that the US government is going to eventually be forced to come to grips with. A monumental federal debt requires LOW interest rates to deal with the mathematics that can quickly make it completely unmanageable. Those days are now behind us.

Take a look at the following chart and you will see what I mean. I had expected that the long bond would find some buying support emerge near the intersection of TWO CRITICAL REGIONS. The first of these was a band of horizontal chart support near the 135 region. The second just so happens to be that region is also the 50% Fibonacci Retracement level of the rally off the secondary low in early 2011 to the peak last fall.

Guess what? The bond market collapsed through that level as if it did not even exist. Next stop looks to be the 61.8% Fibonacci retracement level down near 131 now that the bonds have CLOSED BELOW the 200 week moving average.

Safe havens bonds are now firmly out of favor with the view that tapering of the bond buying program of the Fed (QE4) will now begin as early as September of this year. Rising interest rates are working to bring the US Dollar into increasing favor among global investors as most countries out there with major currencies are no where near to a period of rising interest rates.

It does appear that we are going to be entering a period of rising stocks, rising interest rates and a rising Dollar, all at the same time.

Pretty remarkable isn't it considering that trillions of those self-same dollars have been created by the Fed over the last few years? It just goes to show that demand for the US currency is phenomenal mainly because demand for the other major currencies is rotten!


  1. the fed is keeping short term interest rates anchored at 0 and hasn't the remotest intention of changing that at this time (watch the 3 month bill as the market will anticipate the eventual tightening before the fed catches on). so this bear steepener is setting up for increasing carry trades - and spread lending by commercial banks should soon accelerate too. hmmm.

  2. "The multi-decade bull market in US bonds is clearly over"

    It might be, but it is certainly not clear. This could just be another correction.

  3. Hi Dan - 1. interesting that the top / breakdown in bonds -- the cornerstone to all financial markets -- gets far less press coverage, even from financial journalists, than gold. when it does get coverage it's in isolated bits like PIMCO getting stuck in losing trades--nothing about the systemic ramifications of this.
    2. short term might be good for stock market, but long term, can't be so great as S&P is pretty leveraged, re-fi on debt is only going up. Since much of the earnings were predicated on a lower rate environment...ie "stocks are cheap when interest rates are 0", doesn't look good. Especially as rest of world is doing poorly, US is only doing OK b/c of many trillions of dollars of money printing.
    3. banks are not going to do well right? higher interest rates should give them higher spreads on loans-but they are not lending. they do hold a lot of debt though, right? and that is going down in value as rates rise--so that's not going to help hyper leveraged banks out as their capital shrinks. It would be interesting to see how Deutsche Bank does.

  4. The charts of Gold and Silver looks much worse than the mentioned bonds charts. And that was NOT a top???.

    1. Michael--here's why it's much more important: Value of all gold ever mined at $1,500 /oz is ~$8 trillion. US National Debt as of spring 2013 $16.7 trillion. worldwide debt is something like $100 trillion. Notional value of interest rate derivatives is something like $1.2 quadrillion. I know nothing about banking, debt. etc.

      So while this may be just a correction, etc. it seems that the entire banking structure is built on the premise of a bull market. So what if the bull market ended? I'm posing the question, just think it's interesting.

      Here's a graph

  5. Obama/Bernanke want to protect the US dollar. This is, in my opinion, the final fight between the USD and Gold.
    Expect a lot more volatility!!!

    What is interesting is that the price of oil continues to go up, despite the higher USD. Usually when the USD goes up oil goes down. What is going on in the Middle East could be the reason why oil is up but the direct result of the 2 going up is inflation in Europe is going to start to show UP. This will lead to a stronger recession in Europe. Ask any European reader of this blog and they will tell you (in particular Greek, Spanish, Portuguese... French!!!)

    The whole story seems out of control and comments and warnings from the IMF (check Lagarde's speech in France today) against the US are not only growing but getting louder. What I am waiting for, sooner rather than later, is the rift between Europe and the USA. Many countries have already set up trade and monetary bilateral agreements with China. Many central banks are also getting rid of US Treasury (which could explain the higher rates seen despite the fact that these higher rates are detrimental to the US economy)

    Some analysts are predicting a disaster in the US in the next 6 to 12 months... I can only agree with them.
    As for higher equities, yes...possible (Thank you Big Brother) but I see a lower, not higher DOW before the end of this year.

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