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What is the bond market saying?

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August 02, 2011 – Comments (10)

Absolutely right on post. Goes in line with these observations:

What would happen if the US Federal Government stopped issuing bonds? - http://caps.fool.com/Blogs/what-would-happen-if-the-us/612372
The Phantom Bond Market Vigilantes - http://caps.fool.com/Blogs/the-phantom-bond-market/611923
More on the Non-Existent US Government Bond Market Vigilantes - http://caps.fool.com/Blogs/more-on-the-non-existent-us/613785

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WHAT IN THE WORLD IS THE BOND MARKET SAYING?
from PRAGMATIC CAPITALISM by Cullen Roche

http://pragcap.com/what-in-the-world-is-the-bond-market-saying

Few things have been more confusing to traders in the last few weeks than the action in the bond market. With the USA on the verge of a near default and QE2 now over, there are few investors who would have thought that bonds would be an outperforming asset class. Even bond market “gurus” said: “Who will buy Treasuries when the Fed doesn’t?”\

I’ve pointed out most of these misconceptions about US government debt in real-time and why QE2 was never a “funding” source for government spending, debt monetization, etc. The debt ceiling debate is no exception. It’s been another charade with all the usual players spreading fallacies about the American monetary system.  (If you’ve noticed a bit of frustration in my writing lately it is due to the disgust resulting from the way this entire thing has been handled by our politicians AND the media.  Don’t worry, I’ll get over it!).  

The bond market was never worried about US default or the end of QE2 because that’s not what the bond market takes its cues from. The bond takes its cues from the Fed. And the Fed takes its cues from the economy. The simple message coming from the debt ceiling debacle has not been one of insolvency. Only the media and the fearmongerers were focused on an actual insolvency. The real story here was always the impact of the debt ceiling outcome on the real economy. And the bond market’s message has been loud and clear. Bond traders think this deal stinks for the economy and what they see is an anemic economy.  It’s that simple.


10 Comments – Post Your Own

#1) On August 02, 2011 at 2:04 PM, MoneyWorksforMe (< 20) wrote:

Good post. I have been following the 10-year yield for a while now, and it was one of the most compelling trends to back up my conviction of a sell-off in equities...

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#2) On August 02, 2011 at 2:51 PM, whereaminow (< 20) wrote:

And the Fed takes its cues from the economy.

Nice try, Cullen. The Fed has no idea what is going on with the economy.

David in Qatar

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#3) On August 02, 2011 at 3:02 PM, motleyanimal (48.85) wrote:

Bill Gross is going to be on CNBC in the next hour.

Soon, I will know everything!

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#4) On August 02, 2011 at 5:12 PM, JakilaTheHun (99.93) wrote:

Nice try, Cullen. The Fed has no idea what is going on with the economy.

Maybe, but under your line of reasoning, you're also arguing that the market itself has no idea what is going on with the economy.  Otherwise, why wouldn't the yield on treasuries be skyrocketing in anticipation of the high inflation you argue is being created by the Federal Reserve?

Either the market is wrong and you are right; or you are wrong and the market is right. 

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#5) On August 02, 2011 at 5:36 PM, rofgile (99.43) wrote:

With that figure above, what would the correlation to the slumping of the 10-year T-bond's be with the winding down of either QE1 and QE2?  I would guess that the end of the qualitative easing policies may also explain the falling of both of the second T-bond prices.

When the FED begins to wind down their purchasing, others also sell.

Or is this just a naive idea? 

 -Rof 

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#6) On August 02, 2011 at 5:41 PM, whereaminow (< 20) wrote:

Jakila,

You are always on the attack, and always armed with a knife in a gun fight.

Otherwise, why wouldn't the yield on treasuries be skyrocketing in anticipation of the high inflation you argue is being created by the Federal Reserve?

Define inflation.  

Define how the yield on treasuries is determined.

Get back to me.

David in Qatar

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#7) On August 02, 2011 at 6:12 PM, MoneyWorksforMe (< 20) wrote:

rofgile,

That chart is showing the yield, not price of the bond...You're seeing increased demand for 10-year treasuries during those periods, and that's precisely for the reason binve mentioned: economic weakness. During periods of economic weakness, investors go searching for a liquid "safe haven" and one of the most common is the 10-year treasury...

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#8) On August 03, 2011 at 1:31 AM, awallejr (76.71) wrote:

Except people seem to discount the factor of the demographics of aging.  What do older people do with their money?  They tend to put them in bonds.

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#9) On August 03, 2011 at 9:14 AM, JakilaTheHun (99.93) wrote:

You are always on the attack

Don't get so defensive, David. 

It's not "an attack" on you. It's a simple observation.  Too often when I challenge your arguments, you get extremely defensive and assume it's an "attack."  This is why I often find discussion with you difficult, even though I generally believe you are one of the more intelligent people here. 

But back to the issue:

You've been predicting that the actions of the Federal Reserve will create high inflation.  The bond market suggests the exact opposite. 

How do you reconcile the two?  Do you believe the bond market is wrong? 

The market could be wrong, of course.  It's been wrong before. But I find it very hard to reconcile the predictions for high inflation, with the deflationary views of the bond market.  I also see no evidence that more money is being pumped into the economy; in fact, money could be retracted from the economy over the next year.

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#10) On August 03, 2011 at 10:38 AM, rofgile (99.43) wrote:

MoneyWorksforMe:

 Thanks for pointing out what was wrong in my thinking.  I was reading "price" rather than "yield" - so that completely negates my thought there.

 Best - Rof 

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