Best of the Week
Most Popular
1.Bitcoin War Begins – Bitcoin Cash Rises 50% While Bitcoin Drops $1,000 In 24 Hours - Jeff_Berwick
2.Fragile Stock Market Bull in a China Shop -James_Quinn
3.Sheffield Leafy Suburbs Tree Felling's Triggering House Prices CRASH! - Nadeem_Walayat
4.Bank of England Hikes UK Interest Rates 100%, Reversing BREXIT PANIC Cut! - Nadeem_Walayat
5.Government Finances and Gold - Cautionary Tale told in Four Charts - Michael_J_Kosares
6.Gold Stocks Winter Rally - Zeal_LLC
7.The Stock Market- From Here to Infinity? - Plunger
8.Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - MarketsToday
9.Electronic Gold: The Deep State’s Corrupt Threat to Human Prosperity and Freedom - Stewart_Dougherty
10.Finally, The Fall Of The House Of Saud - Jim_Willie_CB
Last 7 days
Gold Sector is On a Long-term Buy Signal - 21st Nov 17
Saudi Arabia and Israeli Alliance Targets Iran - 21st Nov 17
What History Says for Gold Stocks in 2018-2019 - 21st Nov 17
US Bond Market Operation Twist by Another Name and Method? - 21st Nov 17
Learning from Money Supply of the 1980s: The Power and Irony of “MDuh” - 20th Nov 17
Trump’s Asia Strategy, Goals and Realities - 20th Nov 17
Crude Oil – General Market Link - 20th Nov 17
Bitcoin Price Blasts Through $8,000… In Zimbabwe Tops $13,500 As Mugabe Regime Crumbles - 20th Nov 17
Stock Market More Correction Ahead? - 19th Nov 17
Universal Credits Christmas Scrooge Nightmare for Weekly Pay Recipients - 18th Nov 17
Perspective on the Gold/Oil Ratio, Macro Fundamentals and a Gold Sector Bottom - 18th Nov 17
Facebook Traders: Tech Giant + Technical Analysis = Thumbs Up - 18th Nov 17
Games Betting System For NCAA Basketball Sports Betting - Know Your Betting Limits - 18th Nov 17
Universal Credit Doomsday for Tax Credits Cash ISA Savers, Here's What to Do - 18th Nov 17
Gold Mining Stocks Fundamentals Q3 2017 - 17th Nov 17
The Social Security Inflation Lag Calendar - Partial Indexing - 17th Nov 17
Mystery of Inflation and Gold - 17th Nov 17
Stock Market Ready To Pull The Rug Out From Under You! - 17th Nov 17
Crude Oil – Gold Link in November 2017 - 17th Nov 17
Play Free Online Games and Save Money Free Virtual Online Games - 17th Nov 17
Stock Market Crash Omens & Predictions: Another Day Another Lie - 16th Nov 17
Deepening Crisis In Hyper-inflationary Venezuela and Zimbabwe - 16th Nov 17
Announcing Free Trader's Workshop: Battle-Tested Tools to Boost Your Trading Confidence - 16th Nov 17
Instructions to Stop a Dispossession Home Sale and How to Purchase Astutely at Abandonment Home - 16th Nov 17
Trump’s Asia Tour: From Old Conflicts to New Prospects - 16th Nov 17
Bonds And Stocks Will Crash Together In The Next Crisis (Meanwhile, Bond Yields Are Going Up) - 16th Nov 17
A Generational Reset That Will Redistribute Wealth to the Bottom 60% Is Near - 16th Nov 17
Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - 16th Nov 17
Gold’s Long-term Analogies - 16th Nov 17
Does Stripping Streets of ALL of their Trees Impact House Prices (Sheffield Example)? - 15th Nov 17
The Trump Administration’s IP Battle Against China - 15th Nov 17
5 Ways Bitcoin can Improve its Odds of Becoming the Future of Money - 15th Nov 17
These Headlines Say Gold is Building a Base for Something Big - 15th Nov 17

Market Oracle FREE Newsletter

Traders Workshop

Looming US Treasury Bond Market Crash

Interest-Rates / US Bonds Feb 15, 2008 - 04:27 AM GMT

By: Clive_Maund

Interest-Rates

Best Financial Markets Analysis ArticleLike frightened rabbits scurrying back to the apparent safety of their hutches, investors rattled by the sub-prime shocks and the associated tremors in stockmarkets have been fleeing to the perceived safety of Treasury Bonds and Notes. The bad news is that this time the poacher knows where the rabbits are hiding and rabbit stew is on the menu tonight.

Let's just stop and think about this for a moment - just what is a Treasury Bond? - it is a piece of paper telling you that you are going to receive a fixed sum of US dollars at some designated point in the future.


In the meantime you are going to receive interest, called a coupon, at a variable rate that depends on how the price of the bond fluctuates during the intervening years until redemption. Given the outlook for inflation, interest rates, the US economy and the US dollar, US bonds must rank among the least attractive investments on earth. Buyers or holders of US bonds at this point are making a number of erroneous and dangerous assumptions - including that interest rates and inflation will remain within reasonable bounds and that the US dollar will retain a reasonably high percentage of its value during the life of the bond.

As we know the Fed has lowered short-term rates as an emergency measure, and immediately the crisis ends - and even if it doesn't, it will raise them again. The official inflation statistics are highly misleading - real world inflation is much higher than government figures and is increasing rapidly. The outlook for the US dollar remains dire. Thus the downside risk for bonds is very considerable, and it is likely to be made a lot worse by the fact that investors are going to start demanding much higher returns for the growing risks involved in being a lender.

We will now look at the charts for Treasury Bonds and Treasury Bills, starting with the 1-year chart for the 30-year T Bond. At first glance things look fairly rosy on all the charts presented here. On the 1-year chart for the 30-year T Bond we can see that it remains in an uptrend that has been in force from the low of last June. However, on closer inspection we can also see definite signs of deterioration in the recent past. In the first place, a 5-wave sequence has been completed since last June, which is normally followed, as a minimum, by a 3-wave reaction that breaks the price well below the main uptrend channel.

Another important point to observe is that each successive up wave has become steeper with the last one, wave 5, ending with a throwover breakout Island Top, signaling exhaustion of the uptrend. In addition to marking the end of the 5th wave of the series, this Island Top is also thought to mark the end of the uptrend in force from last June, for the reasons just given above. Still another point to observe is the fact that the wave 5 advance did not succeed in taking prices comfortably clear of the wave 3 peak, and the support in the vicinity of that peak is already being severely tested and looks set to fail shortly. The now large gap between the 50 and 200-day moving averages is another factor suggesting that the time is at hand for a change of trend. It doesn't take a great effort of imagination for holders of T Bonds here to join the dots and come to a conclusion about what to do them, especially given the current comparatively good prices on offer, which are not expected to last much longer.

On the long-term chart for the 30-year T Bond it is interesting to observe that it is still close to its all time highs - all the more reason to get rid of it given the dire outlook. Although close to its highs, we can see that it has, in fact, been weakening for a long time, with a bearish Rising Wedge gradually giving way to a rectangular trading range in recent years, following a breach of the important uptrend line. With prices up at the top of the trading range it is clearly a good place to offload them. Looking at this chart it is hard to envisage the severe bear market that surely lies ahead which will trash the prices of all US Treasuries.

We will look now at the 10-year Treasury Note. As we will see there is not a lot of difference between the charts for Bonds and the charts for Notes, although Notes currently look stronger.

On the 1-year chart for the 10-year T Note the picture is much the same as that for the 30-year T Bond, with both having completed a 5 wave sequence, and an Island Reversal also appearing on the Note chart in January. The most noticeable difference is the stronger 5th wave on the Note chart that took it well clear of the 3rd wave peak and thus far it has not reacted back much following this up wave, so that it is still way above its first support level, unlike Bonds which did not clear the 3rd wave peak by much and are already down on their 1st support level. So, Notes are stronger than Bonds at this point, but that won't help them much as the Island Reversal on both charts signals that they will both go down in unison.

The long-term 10-year T Note chart does not go back as far as the long-term Bond chart above. On this chart we can see how the large bullish Falling Wedge between 2003 and mid-2007 predicated a new uptrend, and we have seen a strong uptrend develop as 'funk money' has fled to the Treasury market as a perceived safe haven. However, the steep uptrend is now believed to have run its course, with the Island Top in the middle of the important resistance level towards the 2003 high, that can just be made out on this chart, looking like the uptrend's last gasp. The overbought status at that point is made clear by the MACD indicator at the bottom of the chart. Even though it looks on this chart as if we could see a little more upside short-term, or the development of a high trading range before it goes lower, it looks set to react soon on this 1-year chart, without any further significant progress.

If your objective is capital appreciation or simply to obtain a reasonable return on capital employed it is very hard to make a case for owning US Treasuries - on the contrary there is a compelling case for avoiding them or getting rid of them. Fundamentally the outlook is dire - the US economy is weakening at an alarming rate - the country is technically bankrupt and running such massive deficits that it makes bankruptcy in the normal sense of the word look tame. Short-term interest rates are being held at an artificially low level by the Fed and that must end, meanwhile long-term rates are rising sharply. Inflation in the US is high and rising, and it is grossly understated by official statistics. The dollar continues to be debased at a breathtaking pace and renewed severe decline appears to be inevitable, despite the enthusiastic efforts of other countries and trading blocs to emulate the US by debasing their own currencies. Technically, as we have seen, the recent strong uptrend in Treasuries appears to have run its course and the prospect is for a retreat that could easily accelerate into a savage and severe bear market. Given the unprecedented dangers to the world financial system at this time, US Treasuries could easily end up priced at a mere fraction of their current values.

Could this analysis be confounded by Treasuries breaking above the strong resistance at their 2003 highs and accelerating into an even steeper parabolic spike? - of course it could - anything is possible in markets. However, such a development looks highly unlikely at this point, and traders taking positions in anticipation of the Treasury uptrend breaking down can guard against an upside breakout and spike by the simple expedient of placing stops above the 2003 highs.

There is an article doing the rounds that makes the argument that with the election season powering up in the US, the elites will order the press to support the dollar at every turn and 'gin up' the economy, and also surmises that the G7 ministers have decided that competitive devaluation against the dollar is getting them nowhere, and they will therefore turn on gold instead, this being the underlying reason for the IMF announcing that it will sell some of its gold reserves. This combined with a drop in demand for gold from China and India will conspire to ensure a seasonal drop in the gold price from now on until August, it also presupposes. In addition it claims that the Saudi's will likely help out their old friend George by dropping the oil price over the Summer ahead of the election.

This article makes a lot of assumptions, not the least of which is that the elites maintain complete control over the economy, major financial institutions, the press and even the mindset of international investors, when the events of the past 6 months have clearly demonstrated that they have lost control. The elites have, with their market deregulation and financial engineering, bred an enormous Godzilla like monster which, having eaten its fill, has bust out of it pen and is on the rampage, and it is actually rather amusing to watch its former masters running after it in a futile effort to regain control, whilst at the same time trying to fool the world at large that they still have any semblance of control.

The article also overlooks the fact that the same Plutocratic elites control both the Democratic and Republican parties - the election is nothing but a pantomime performed to maintain the illusion of democracy for the masses - every single second you spend watching electioneering in the US is a second of your life wasted. It is of course flattering to gold that the G7 ministers should think that depressing its price is an alternative to the path of competitive devaluation against the dollar, the only trouble is that the notion is absurd - a rising gold price may bear witness to the incompetence of their policies, but since when was incompetence in high places an insuperable problem. So what if the gold price rises?

Sometimes you have to be cruel to be kind. While Treasuries have undeniably made impressive gains over the past 8 months, anyone continuing to hold them forthwith given the now appalling and worsening fundamental outlook and the recent technical deterioration must be classed as a fool. The only exception being those elements on Wall St and elsewhere who are intentionally misallocating the resources of others into Treasuries for abstruse reasons.

By Clive Maund
CliveMaund.com

© 2007 Clive Maund - The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

Clive Maund Archive

© 2005-2017 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

Catching a Falling Financial Knife