Because it is Fed day (don’t you just love Fed day?) and because I have got Prechter in my head, we’ll stay on the topic of the long bond. The FOMC ostensibly has some kind of decision to make about Treasury bond manipulation today.
Dial back with me if you will to a happier time for inflationists. It was the spring of 2011 and the ‘right’ kind of inflatables were blasting off all over the place, led by silver. The inflation bulls were geniuses then. Why, even the Bond King declared his bearishness against long term T bonds and put his high profile bond funds short against it. Ah, no dear sir, incorrect. The ‘Continuum’ was at a turning point from up to down.
What was actually in store was a deflationary environment during which the usual inflatables got hammered along with much of the world. Here in the good old US of A the effect manifested as Goldilocks, with genuine deflation forestalled at least.
Today, in keeping with the theme that has seen legendary market luminaries and long time newsletter writers alike close up shop due to confusing market signals that just don’t seem to make sense, we have the Deflation King (Prechter) declaring he is bearish on T bonds, expecting as Gross had 3 years ago, for the yield to break out… this time (in response to inflation).
Sometimes I think it is an advantage being a relative simpleton instead of a market luminary. I have no clue if the yield is going to break out this time (nor if the ultimate condition for the next year or two will prove inflationary or deflationary for that matter) but I do know that I am not smart enough to make predictions like that. I am, in the tradition of the earliest Hominids, a simple tool user.
The tool above says that nothing has happened yet that threatens a condition in T bonds that has been in place for decades.
In September I wrote a post where gold made the same wise guy statement, because there is a valid argument that sees the onset of a ‘tapering’ regime as positive for gold.
Today it is the very asset class in the cross hairs of tapering, long term Treasury bonds that is saying ‘Taper this you mofos!’ Amidst all the hysteria about reduced bond purchases by the Fed the TLT fund is holding an important moving average and threatening to turn up.
It is so cool to think about how utterly enthralled the herd is with policy makers these days (doing a 180° to 2011 or 2009). As if policy makers were not compelled to start babbling about tapering because long term yields had already bottomed and turned up. They then rose persistently right to the targets that NFTRH had all along. Voila, tapering initiated at the last FOMC.
Yields rise = taper jawbones in the media; not taper jawbones in the media = yields rising.
Today if yields do the contrary thing and decline (into an eventual counter cycle) maybe Huey, Dooey and Louie will start jawboning a tapering of the ‘taper’ talk. Only this time, I would not necessarily expect a resumption of full QE to hurt gold; not if it comes in response to a decelerating economy. That’s a big detail sitting right in the middle of the analytical equation.
Okay, so the post riffed a little and got off its original message, which would be that T bonds are threatening to put a majority off sides due to their own herd following behavior patterns. There, now I’m done.
The asset with which our long-term yield ‘continuum’ is associated continues to look constructive for a move that puts the herd off sides. Long term Treasury bonds remain in a stance where they can bottom…
…despite all the rising yields hype going around. Cue the Continuum…
It is time for the long bond to reverse because if it doesn’t, we are down a rabbit hole with respect to what has been for the last oh… several decades. The backbone of what has been would be broken and so would the Continuum we so often review on the yield’s big picture.
I don’t want to go on like a raving lunatic about the implications of a secular breakdown in bonds because I am not sure what they would be. Sure, Wall Street is selling the Great Rotation ™, and I think stocks might indeed go higher for a while. But at some point rising interest rates would be likely to effect the economy and provide investment competition for over valued stocks.
So is USB going to reverse as it did at the two previous yellow shaded breakdowns or is this it?
The answer to the title’s question is going to be an important one in 2014. The 10 year continues to hold the bullish pattern we noted a few weeks ago, and the items in the lower panels are giving mixed signals about what they think is coming.
It’s ‘taper’ talk time again and here is a post that is only too happy to join the cacophony…
Dear Federal Reserve, please signal what would be at least a symbolic gesture to the market and pretend to tighten policy by beginning a tapering of long-term bond buying. We know inflation is being promoted via ZIRP at the discount window and via money printing used for T bond and MBS asset purchases.
Now it is time to ‘taper’ and let long-term yields rise if that is what the free market wants them to do. Given the decades-long limit at the 100 month EMA (AKA the deflationary backbone) potentially imposed by this chart, a further rise in yields is debatable anyway if all you plan to do is taper a bit. The ‘Continuum’ in the Long Bond’s yield is at this would-be limit point after all.
30 Year Yield, Monthly
Since this is among many others, an indicator to the macro funda climate for gold, it is notable that the 30-5 spread is dropping below the 50 day moving averages, putting a would-be bottoming pattern in question for the ratio. Gold tends to be correlated to Treasury yield spreads, rising and falling with them generally.
NFTRH has had to remain bearish (aware of a possible final waterfall that swamps the bottom callers and potentially ends the bear) on the near term price of gold and gold stocks at the risk of being mocked as a contrary indicator. That is not because I am afraid of buying a potential bottom. Long time readers know that I have routinely stepped up to the plate on bottom feeder buying op’s.
But this time, unlike Q4 2008 for example, the funda’s are just not there, no matter how loudly people bullhorn China buying, COMEX shenanigans or Fed/Goldman conspiracies. The yield spread above had been constructive, but now it is joining a chorus of other indicators saying to use caution in the near term and tune out the bottom callers.
The idea remains to be intact first and ready to speculate second.