UPDATE: Congress has added a new mandate to the Fed’s responsibilities. Every Sunday during the NFL season the FED will have control of the official balls for all NFL games because the central bank has proved it will never let anything deflate.
***Another day of violent action in the global bond markets. In the early hours of the morning prior to the U.S. bond market opening it appeared as if the ECB has been in the market purchasing sovereign bonds to satisfy some of its monthly quota. European sovereign bonds were bid and the euro currency was stable. The U.S. DATA RELEASE of the day, retail sales, was weaker than estimates, giving impetus to a further rise in U.S. and European bonds. However, the rally proved to be short-lived … yet again. The short end of the yield curve is data dependent while the long end is dependent on the kindness of strangers. Global fund managers, and probably sovereign wealth funds, seem to be ready sellers of all assets of any length beyond five years. The yield curves are steepening throughout the developed world.
A few examples of the moves in yield curves over the last three weeks: The French 2/10 curve has gone to 109 basis points from 50; German 2/10, 86 basis points from 35; Italian, 167 basis points from 105; and the Spanish 2/10, 178 basis points from 111. These are dramatic moves in a very short period. If this is just the market correcting from a very severe overbought situation then this is healthy but the continued selling could be a sign of what previous Fed Governor Jeremy Stein warned about. Too much QE could prove to lead to a dangerous over-valuation of all asset classes.
Last week, Janet Yellen warned of a over-valued equity market but not to the level of the extreme values of the entire range of bond assets. Today the European sovereign bonds closed below their 200-day moving averages. Could this be a harbinger of renewed selling pressure for the remainder of the week? It has been a theme of Notes From Underground that the world’s central banks were in danger of losing their credibility by the constant efforts to stimulate asset prices in an effort to create a PORTFOLIO BALANCE CHANNEL (Bernanke, Jackson Hole 2010), or, in laymen terms, stimulate investors and savers to absorb more risk by selling their bonds and bank deposits and putting money to work in assets of greater risk. Did the Fed, ECB and BOJ push so far that investors are now concerned that the QE experiment is in danger of being beyond the control of authorities (rhetorical question)?
Today as the BONDS closed below the 200-DMA, the GOLD and SILVER markets were approaching their long -term moving averages. (Even as long bond yields were rising, the precious metals were rallying, bucking the wisdom of the talking heads in financial media.) More importantly, the GOLD/SILVER ratio closed beneath the 200-DMA for the first time since August. It has been my observation and analysis over the years that no serious precious metals rally occurs unless it is the SILVER leading the way.
My theory will certainly be tested in an environment where a large central bank may be the acquirer of massive amounts of GOLD but if history proves to rhyme it may be that the Chinese will be BI-METALISTS (see Chinese Opium War and payments for the Boxer Rebellion). One day does not a trend make but the recent weakness of the U.S. dollar and today’s rally in the precious metals in the face of rising bond yields suggests that attention must be paid to all asset classes. Investors and central bankers are becoming testy … of each other.