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U.S. Treasury Bond Market Alert: This Should Scare The Heck Out of All of Us Right Now

Interest-Rates / US Bonds Apr 05, 2010 - 04:59 AM GMT

By: Mario_Cavolo


Best Financial Markets Analysis ArticleI remember a few years back when in fact, I knew nothing about "bonds" and the word confused me. I'll save you that ignorance and suffering real quickly here; A government bond is a low risk loan and it pays you a steady low interest rate, for example, such as a 10 year U.S. Treasury Bond; for 10 years, you'll receive a yield, for example of, 3% per year and your money is regarded as being in the safest possible place it could be.

However, now interest rates in the bond market are rising. The issue is now center stage according to a fresh article on the subject at MarketWatch. I'm afraid hell has arrived, while the market is still doing its best to ignore it. Its easy to explain and understand why and it is frightening to consider the coming consequence. More so, it is a timely issue currently being ignored by the markets but ready to rear its ugly head.

Why? Well, if you were going to loan someone money and they already had a big debt load, then you would want to charge them higher interest for the added risk? Right? John is willing to loan $10,000 to Mary. Mary has very little existing debt. John says "Cool, I'll charge you 5%." Simple. But if Mary already owes other folks a million dollars, John hesitates. He's going to say to Mary, "Hey, you owe a lot of existing money already, I'll make you the loan but i want 9% per year instead of 5% per year." Mary ponders the options: get choked by rising interest rates on her debt offers or starve by lack of fresh money. This is what happened just this past week when the U.S.yields Treasury auction essentially flopped. Bond buyers at the auction drove the bond yields higher. Give us higher interest yields or we're not lending the money. Ouch.

And that's exactly the global economic story regarding government Treasury bonds; it is a frighteningly accurate indicator of the global economic new reality and will derail if not destroy the current rally/recovery in stocks, gold, oil, commodities and anything else economic. Saying it one other way; if interest rates on the massive trillions of loans (bonds and any other kinds of free market debt) start to rise, the interest expense will choke and strangle the economy at every level.

The Stock Market Will Decline / Go Flat

Again,why? Because if you can get higher interest with lower risk, you will generally choose to get out of those high risk investments. The golden rule: interest down, stocks up, interest up, stocks down.

The Price of Crude Oil Will Decline

Again, why? Rising U.S. Treasury interest rates will cause more of us to park our liquid cash in safe haven US dollars. The US dollar uptrend against the other currencies will continue. We sure as heck are not going to put our money in Euros or Japanese Yen right now. Oil is priced in US dollars. Oil will go down as the dollar goes up and as economic growth stagnates, oil demand will decline.

Foreign Currencies Will Tank

Again, why? US dollar rising means it is rising in value against the world's other currencies. Already for this year, the major position plays are long USD / short Yen and Euro. Any rise in the bond market interest rates would strengthen that position.

Gold Will What?

Hah! Still no one can figure gold out. If it is supposed to be a "safe haven" that many analysts claim, then it would go up in value with the rising USD. We'll see if that happens or if it is more regarded as a speculative risk asset and falls with stocks and other risk assets. Generally, right now gold is taking a breather which could last a few months but expect it to start its upward climb once again.

Oil Price Manipulation

Here's another example; The price of crude oil at $85 is a SHAM. It is a price manipulated upward by Goldman Sachs and "Big Oil" and all the other neo-capitalist interest groups unrelated to bloating inventories and lax demand. Why? Because the oil companies had invested billions in infrastructure/exploration development back in 2008 just before the economic crisis hit. They made those investments assuming oil's price would continue to hover no lower than the $90 to $100 range. So now, big oil business needs oil at that price level, which has nothing to do with oil being priced by supply/demand as a commodity. Supply inventory continue to increase and the price of oil rallies higher? Anyone can smell a rat on that one.

My friends, this we call the coming global inflation to brace for; it is already happening here in China with inflation much worse than any statistic you'll find in the media. For global inflation, crude oil's price is the marker, the sherpa, the benchmark, the proxy that shows us the future of prices where the elite rich capitalists/oil conglomerates push the price where they need it. Speculation, control and manipulation of market prices is more prevalent than ever before in the new reality. This economic recovery cannot afford $85 crude oil.

Bond market yields on the rise, exactly as I said - The New Reality
China's booming but inflation threatening growth and stability - The New Reality
Crude oil's price speculatively pushed up - The New Reality
U.S. Mortgage market rate resets coming in July - The New Reality
European sovereign debt crisis looms with little improvement - The New Reality
The future is inflationary - The New Reality

I don't know if somehow Geithner and friends are going to somehow be able to block the yield rise in the bond markets this week, next month, in July or what? But I know if it continues according to this week's signals, the new reality is going to show its ugly side much quicker than anyone expects, which by the way, is exactly how bear corrections and nasty reversals do come along. So then, besides your long positions, consider having a long term short position in place such as with the LEAP options.

As far as the impact on China's economy and markets, its much the same. Here in China, inflation is much worse than reported in the media so the pressure tightening bank lending policies including pushing up interest rates is very real.

Celebrating Mario's Bloomberg Television interview, Mario's Market and China Advisory Monthly Newsletter is available at $109 per year PLUS you receive a FREE copy of The New Reality, Mario's 111 page jam-packed book instantly delivered as an e-book to you. Visit for an overview and FREE 30 day trial.

By Mario Cavolo

Biography: Mario Cavolo has been based in China for over 10 years. He is a professional speaker, writer and media event personality providing multinational and media industry clients with training, coaching, communication, market research and advisory services. Take advantage of Mario’s “on the ground” China insights by visiting and, where you will find insightful articles and commentary on business challenges, communication, and global market advisory with a special focus on China business and culture.

© 2010 Copyright Mario Cavolo - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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