Notes From Underground: Is There Something Bigger Bothering the Bond Markets?

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.

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9 Responses to “Notes From Underground: Is There Something Bigger Bothering the Bond Markets?”

  1. Joe Says:

    –RIM SHOT–

  2. Blacklisted Says:

    Fortunately, or unfortunately, depending on what team one is on, the Fed is like the NFL and Brady is the Invisible Hand, which has the ultimate say on whether to deflate.

    “Too much QE could prove to lead to a dangerous over-valuation of all asset classes.” Maybe, or too much QE (debt) can lead to a dangerous level of devaluation in govt, and an over-valuation in tangible assets (which does not include the long term solvency of western govt’s).

    “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)?” The QE experiment has never been in control of authorities (most experiments that have never been attempted rarely are).

    My theory is precious metals will rise when the lack of confidence in govt becomes obvious to the masses (not inflation concerns), which means the only reason silver would lead is its greater volatility.

  3. Cristinagreta20 Says:

    HSBC: Central Banks Are Running Low on Ammunition via Bloomberg

  4. ShockedtoFindGambling Says:

    Yra- I noticed that 5 year CDS (non ISDA) on USA Treasury debt went to 20 yesterday, from about 15.5 the day before. The highest rate that I have seen in the last 2 years is 19.5.

    I don’t consider this significant yet…….. a lot of the daily change in CDS is the move from bid to offer.

    But if USA CDS starts trading in the low 20s, I think it would be significant.

    That said, I don’t have a good source of CDS quotes…..just an email I get once a day.

  5. yra Says:

    shocked–i need to watch it more myself–suffering from the complacency of times past

  6. rob syp Says:

    Do you comment on the art market other then how can so few have so much.

    • Joe Says:

      If I may jump ahead of Yra. The “ART” market has always been exclusive to the .1%. Some people mistakenly believe the Rothschild’s et al bought it as an inflation hedge. Unlike CNBC commentators, I never believed it had the first thing to do with finance and everything to do with ego. I’m thinking the “art” market could be an indicator of some sort, if you can figure out who among the sellers and buyers are those who buy, hold, and show or donate; or those who truly covet. Then there’s the odd ball among the class, having a modest ego, who just buys something because they like to look at it. 🙂

  7. rob syp Says:

    Yra: Would you or anyone else comment on the below link about the Q ratio…. thank you.

  8. yra Says:

    rob syp–have been a fan of Tobin’sQ since i read it and it led me to Andrew Smithers and his book,Valuing Wall Street.It is a mean reverting theory but has an anchor based on building versus buying in order to increase the size of a business—when equity is cheaper it is easier to attain growth through acquisition while when valuations are high it is more efficient to build from within.It is nver this easy because when the Weighing machine is assigning an extraordinary high multiple to your company it makes sense to spend the inflated asset to acquire a quality asset with inflated paper–but this is more an example of Gresham’s law in which bad money is spent and good money hoarded

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