Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Tremors in the US Bond Market

Interest-Rates / US Bonds May 25, 2007 - 10:05 AM GMT

By: Money_and_Markets

Interest-Rates

I've had plenty to talk about in recent weeks — underperforming REITs … the ongoing problems in housing … risky commercial real estate financing … private equity firms gone wild … overseas profit opportunities. These are truly interesting times in many markets.

But there's been one thing I haven't talked about — interest rates. The reason? They haven't been going anywhere. You ever see one of those EKG machine readouts? That's what the chart of 10-year Treasury Note yields has looked like since last August.


However, we may finally … finally … be getting the interest rate breakout I've been looking for. And the direction of that breakout is HIGHER!

This has obvious implications for interest-rate-sensitive sectors like residential and commercial real estate. It could also affect the broader market, too. So today I want to tell you …

Why the Snoozefest in Bonds May Be Coming to an End

When professional traders want to speculate on U.S. interest rates, they primarily use bond futures. And for several months, 30-year Treasury, or "long bond," futures prices have been fluctuating in a range — roughly between 109 16/32 and 115.

Remember, bond prices and yields (meaning, interest rates) move in opposite directions. But when bond prices go nowhere, interest rates remain stable. For example, the yield on 10-year Treasuries has vacillated between 4.43% and 4.90% for about nine months.

The primary reason for the lack of action in bonds? The economy has been trapped in what I call "Stagflation Lite."

See, inflation remains above the Federal Reserve Board's preferred range. Typically, that would drive bond prices lower and interest rates higher .

However, economic growth has been weakening — the economy expanded just 1.3% in the first quarter, the smallest gain in four years. Economic weakness typically drives bond prices higher and interest rates lower .

Bottom line: We've seen a big battle with a lot of bloodshed … but no real progress on either side. Thus, bond prices and interest rates have been stuck in neutral.

That may finally be changing, though. I see four reasons why:

1. China diversification fears — When it comes to currency reserves, China is the 800-pound gorilla. Its reserves topped $1.2 trillion in March, up 37% from a year ago. That accounts for 23% of the world's reserves, far ahead of the next largest player (Japan at 17%).

China's money pool is swelling because the country is running massive surpluses with its trading partners. In the past, it was content to just let the vast majority of that money sit in low-yielding U.S. Treasury bonds and other debt instruments. At last count, it had more than $420 billion of them.

Now, China is now looking to diversify its reserves into other investments. It's setting up a reserve-management business that will take those funds and invest them in all kinds of instruments — foreign stocks, Chinese firms, and more. We just learned, for example, that China is giving $3 billion to private equity firm Blackstone Group.

If China stops buying so many Treasuries, who's going to step up to the plate? That's a question bondholders can't answer, so they're turning into nervous sellers.

2. Inflation concerns are winning out — It was easy for bond traders to ignore high inflation readings a few months ago when the economy was falling apart, housing was crashing, stocks were tanking, and oil and gas prices were slumping.

But a few recent economic readings (initial jobless claims, industrial production, etc.) have leveled out. And while the news on housing isn't getting better, it isn't getting much worse, either. Plus, the global stock markets are rallying sharply.

As a result, fixed-income investors are finally focusing on the elephant in the room: Inflation. The fact of the matter is that import prices, producer prices, and overall consumer prices are all still rising at a decent clip. The so-called "core" Consumer Price Index isn't rising as quickly as it was a few months ago, true. But it remains well above the Fed's comfort zone.

3. Foreign interest rates keep on climbing — I've said it before and I'll say it again: While our central bank has wussed out in the anti-inflation fight, foreign central banks have not.

The European Central Bank is raising rates. The Reserve Bank of New Zealand is raising rates. Central banks in India and China are raising rates. And so is the Bank of England (BOE). In fact, policymakers at the BOE even considered raising rates by half a percentage point at their most recent meeting, rather than the customary one-quarter of a percentage point.

Until recently, those foreign rate hikes mostly impacted the U.S. dollar — driving its value down. Now, those rate hikes are starting to push up U.S. interest rates, too.

4. The technical pattern doesn't look good — Some investors consider "technical analysis" a bunch of mumbo jumbo. But I think reading the charts can be a great way to get a feel for what the big-money investors are doing. It can give you a "tip off" that a major new trend is unfolding.

Right now, things aren't looking so hot for bonds. Take a look at this chart and you'll see prices peaked in early December. They made one lower high in late February, then a second lower high in early May. All that's left is what I call "last ditch" support in the low 109 area. If that gives way, bonds could fall off a cliff.

What You Can Do To Protect Yourself …

A flood of easy money, fueled by low interest rates, has helped grease the market's wheels for some time now. It's why you've seen so many leveraged buyouts, corporate takeovers, surging valuations, and rocketing stocks.

But if the bonds do break down, and interest rates punch through the top end of their recent range, that could throw a real wrench in the works for Tremors in the bond market

Also, when rates are rising, short-term instruments hold their value much better than long-term bonds. Treasuries with shorter-term maturities also allow you to continually reinvest your money at higher and higher rates.

So continue to keep your fixed-income money in short-term instruments . That includes three-month or six-month Treasury bills, Treasury-only money funds, or exchange-traded funds that hold Treasuries with maturities of two years or less.

Lastly, now might be a good time to pocket some of the big gains you may have racked up during this sharp market rally. At the very least, consider tightening some stop losses. Because if bonds do break down, we could be in for some fireworks!

Until next time,

By Mike Larson

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .


© 2005-2019 http://www.MarketOracle.co.uk - 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