Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19
Where is the Top for Natural Gas? - 7th Nov 19
Why Fractional Shares Don’t Make Sense - 7th Nov 19
The Fed Is Chasing Its Own Tail; It Doesn’t Care What You Think - 7th Nov 19
China’s path from World’s Factory to World Market - 7th Nov 19
Where Is That Confounded Recession? - 7th Nov 19
FREE eBook - The Investment Strategy that could change your future - 7th Nov 19
Is There a Stock Market Breakout Ahead? - 6th Nov 19
These Indicators Aren’t Putting to an Economic Resurgence - 6th Nov 19
Understanding the Different Types of Travel Insurance - 6th Nov 19
The Biggest Gold Story Of 2020 - 6th Nov 19
Best Money Saving FREE Bonfire Night Fire Works Show Sheffield 2019 - 5th Nov 19
Is the Run on the US Dollar Due to Panic or Greed? - 5th Nov 19
Reasons Why Madrid Attracts Young Professionals - 5th Nov 19
Larger Bullish Move in USD/JPY May Just Be Getting Started - 5th Nov 19
Constructive Action in Gold & Silver Stocks - 5th Nov 19
The Boring Industry That Hands +500% Gains - 5th Nov 19
Stock Market Chartology vs Fundamentals - 4th Nov 19
The Fed’s Policy Is Like Swatting Flies with Nuclear Weapons - 4th Nov 19
Stock Market Warning: US Credit Delinquencies To Skyrocket In Q4 - 4th Nov 19
Stock Market Intermediate Topping Process Continues - 4th Nov 19
Stock Market $SPY Expanded Flat, Déjà Vu All Over Again - 4th Nov 19
How To Buy Gold For $3 An Ounce - 4th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

Bond Vigilantes are Fighting the Fed By Pushing Up Yields

Interest-Rates / US Bonds Apr 28, 2009 - 08:27 AM GMT

By: Ashraf_Laidi


Best Financial Markets Analysis ArticleCant' fight the Fed? Bond vigilantes are fighting the Fed and winning at bidding up bond yields. Short of another shock-&-awe policy announcement this Wednesday, the FOMC decision is likely to generate fresh dollar strength against risk currencies (non-JPY).

The FOMC announcement is not expected to generate the fireworks from the March 18 meeting of buying long term Treasuries. Yet, considering the combination of rising US bond yields testing 5-month highs with $101 billion in new issuance this week, the need for the Fed to rein in long yields could re-emerge. In the event that the FOMC statement makes a discreet reference to improved market economic/dynamics (such as slowing pace of decline, tentative signs of stability), bond yields could easily snap back up. To prevent that, the Fed will have to clearly reiterate that the "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period".

With the US Treasury estimated to borrow about $3 for each $1 purchased by the Federal Reserve this year in long term paper and agency mortgage securities, supply will continue overwhelming demand, and so will the upward impact on bond yields. And as the US Treasury/Fed grows more sensitive to China's concerns with the repercussions of soaring US debt, stabilizing long term yields becomes more paramount than ever. The FOMC decision to buy up to $300 billion in LT treasuries at the March 18 meeting was a surprise due to the Fed's prevailing rhetoric at the time signaling no immediate need for such purchases. But when we consider the fact that Chinese Premier Wen Jiabao had stated earlier that week the need for the "...United States to honour its words, stay a credible nation and ensure the safety of Chinese assets..." the Fed decision becomes less of a surprise. Those comments had lifted 10 year yields for three consecutive days leading to the FOMC decision.

With the dollar sustaining strength against most major currencies, the Feds priority will remain geared at stabilizing bond yields without worrying about prompting a durable sell-off in the currency. The Fed hopes for well received auctions this week ($40 bln in 2-year notes Monday, $35 bln in 5-year notes, $26 bln in 7-year notes on Wednesday. Then right after the Wednesday decision, the Treasury will announce how much in 10 and 20-year treasuries it intends to raise.

Only to the extent to the that FOMC announcement succeeds in dragging down bond yields will the decision weigh on the US dollar to the benefit of gold. The chart below illustrates that the inverse correlation between the gold and yields had intensified earlier this year as markets began to anticipate the Feds purchases of LT treasuries, which helps gold via a deepening of credit easing and dollar declines. The daily correlation since April 1st was a significant -0.62, compared to a merely -0.27 since January and -0.09 since September.

Considering the upward movement in global bond yields, this weeks US auctions and growing signs of stabilization in some economic data sets, the FOMC will have to pull another shock-&-awe announcement on Wednesday to bring down yields. Anything short of that, the dollar could resume its upward momentum against risk currencies (non-JPY), while gold is likely to be caught up between the negative effects from a rising dollar and the positive impact from a falling stock market. Hence, absence of aggressive Fed action could once again dissipate the inverse gold-treasury relationship (both move higher), especially as stocks set to start their upcoming 2-month down cycle

P.S. Gold tests the top of the trend line resistance extending from Feb 20. The peak of the line has been reached at 1-month intervals (Feb 20, Mar 20 and Apr 27), looking to test $940 by mid week.

By Ashraf Laidi

Ashraf Laidi is the Chief FX Analyst at CMC Markets NA. This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

Ashraf Laidi Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules