"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


Wednesday, April 20, 2011

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.


  1. Beautifully put Trader Dan. Let those who have dug this pit, fall into it.

  2. Dan, save this one for posterity. Well done!

  3. Adding emotion to the cold hard facts results in an outstanding post!!

  4. "...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."

    Great charts, magnificent point! Thanks.

  5. Excellent post Dan. You would find much to agree with in this Steve Wynn (Wynn Resorts) interview on FOX:


  6. Thanks Dan. Great work, again.

    And thank you for responding to my questions yesterday on that silly article that criticised your view of the HUI manipulation.

  7. Dan,

    Once again, thank you for all your hard work and analysis.

  8. JP thanks for the link - that was excellent. This guy really does get it!

  9. The 74.00 US DOLLAR INDEX is just about to be broken if the FINVIZ chart is correct. Any other char links would be appreciated....

    The News UNIT Blogspot

  10. @TNU: But, don't worry bonds will be flat or up today. That's the point of Dan's analysis.


  11. You are one among the very few that give us the confidence we seek in these bizarre times.. Thanks very much Dan for your willingness to share your passion with us, it is highly appreciated!

  12. I have a question regarding silver price action..does this rally look similar to the one in 2008 when premiums were going higher...and delivery was few weeks later...could you compare current trend to the one happened in 2008

  13. Dan, I've got to ask the obvious noob question here, for those not versed in PM's and the market. How WILL this likely end for the bond market? At what point is the Fed unable to mask this distortion, and at what point does the market stop playing along with the game?

  14. to let this continue as all politicians have is pure treason to this country and its people,even if half of them are on the dole..

  15. I've begun buying into inverse long bond funds like RYJUX and RRPIX. Since I (like everyone else) have no idea how long the Fed will be able to keep up this charade, my plan is to buy on a cost average plan of small lots steadily accumulated over time, hopefully to offset the decay factor.

    Any opinions regarding this strategy?

  16. Thanks so much Dan for the great insight. I don't feel the Fed has to choose the lesser of 2 evils (dollar collapse vs. supressing yields), however. So far, the Fed has not bought bonds on the long end of the curve because they want their $3T balance sheet to be flexible enough to support further <7 year purchases. In other words, I think the dollar and the 30-yr can both roll over, unless the Fed announces QE3 will target the long end. Will be interesting to watch.

  17. I don't understand what they have done and how they have done it. Can someone simplify this for me please?

  18. Splodeydope;
    I think we will all find out if the Fed were to announce an end to QE and then suggest that they wanted to actually reduce the size of their balance sheet. then we could see who is going to buy all those bonds and notes that they have loaded themselves up with. They own more treasuries than China so who the heck is going to buy all of those things?

  19. Or put another way, how can you be sure this is manipulation just by looking at the charts?

  20. Dan, You described everything very beautifully. I become an of you. How did you do ?? It sounds like you plan everything before writing a single post..Great Job Dan !! Keep it up !!

    Vintage ring


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