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
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20
Gold Mining Stocks Fundamentals - 18th May 20
Why the Largest Cyberattack in History Will Happen Within Six Months - 18th May 20
New AMD Ryzen 4900x and 4950x Zen3 4th Gen Processors Clock Speed and Cores Specs - 18th May 20
Learn How to Play the Violin, Kids Activities and Learning During Lockdown - 18th May 20
The Great Economy Reopening Gamble - 17th May 20
Powell Sends a Message With Love for Gold - 17th May 20
An Economic Renaissance Emerges – Stock Market Look Out Below - 17th May 20
Learn more about the UK Casino Self-exclusion - 17th May 20
Will Stocks Lead the Way Lower for Gold Miners? - 15th May 20
Are Small-Cap Stocks (Russell 2k) Headed For A Double Dip? - 15th May 20
Coronavirus Will Wipe Out These Three Industries for Good - 15th May 20
Gold and Silver: As We Go from Deflation to Hyperinflation - 15th May 20
Silver's Massive Undervaluation Relative to Gold Makes It Irresistible - 14th May 20
Bitcoin Halving Passes with no Fanfare, but Smart Money is Accumulating - 14th May 20
Will Job Market from Hell Support Gold? - 14th May 20
The Tragedy Of Missed Covid-19 Opportunities - 14th May 20
Worst Jobs Report In US Economic History - And The Stock Market Continues To Rally - 14th May 20
NASDAQ Sets Up A Massive Head and Shoulders Pattern - 14th May 20
Perceiving Coronavirus as a Disruptive Technology - 13th May 20
Why Financial Trouble Brews on the "Home" Front - 13th May 20
Stock Market ‘Sentiment Event’ Rally Grinds On - 13th May 20
The Fed Now Owns All Markets - 13th May 20
Fruit Trees Gardening to Beat Coronavirus Blues - , Apple, Cherry, Kiwi, Pears, Plums, Grapes, Bananas May 2020 - 13th May 20
Gold Investors Shouldn’t Be Losing Focus - 12th May 20
S&P 500 Bulls Again At Resistance – Now What - 12th May 20
US Fourth Turning Accelerating Towards Debt Climax - 12th May 20
Gold in the year of the Coronavirus Pandemic - 12th May 20
Hi Ho Silver : Away! - 11th May 20
The Great Stock Market Disconnect - 11th May 20
The Big Move In Silver May Be Right Now - 11th May 20
Finding Winners in the Wreckage of the Coronavirus Economic Downturn - 11th May 20
Brave New Corona World – A heated Debate between Steven Pinker and Aldous Huxley - 11th May 20
Coronavirus Catastrophe Stock Market Implications - 10th May 20
US Stock Prices are Ignoring the Economic Meltdown, Wait for it… - 10th May 20
Forecasting Crude Oil: This Method Has Been the Undefeated Champion Since 1998 - 10th May 20
Coronapocalypse and Gold - How High Is Too High for the Yellow Metal? - 10th May 20
The Illusion of Owning Gold - 10th May 20 - Nick_Barisheff
The Financial Crisis Will Continue To Lurk Even If the Lockdown Gets Eased - 10th May 20

Market Oracle FREE Newsletter


U.S. Bond Market Bubble is Reaching Epic Proportions

Interest-Rates / US Bonds Dec 16, 2014 - 04:39 AM GMT

By: EconMatters


The 10-Year Bond now has a Yield of 2.08% right before the all-important Fed Quarterly Meeting and Press Conference this Wednesday, the 10-Year basically lost 24 basis points in a week, and mind you the week right after the strongest Employment Report (a positive 321,000 jobs added for the month) since the Financial Crisis, capping what has been a remarkable year in added jobs to the US economy, even wages spiked 0.4 % with strong upward employment revisions for the prior months. In short, in a normal functioning Bond Market Yields should be rising with improved economic conditions. Especially in a week with a robust Retail Sales Report up 0.7 % for the month. Bond Yields in the US should be much higher given the strong economic performance for 2014, and the Fed not only exiting QE, but about to start raising rates in 2015.

Too Much Cheap Money Sloshing Around Financial Markets

In short there is just way too much liquidity in the system, and buying of any assets is what follows regardless of price or the fundamentals, and the Bond Market is such a bubble right now that the Fed needs to start pricking it fast before it crashes all at once where everyone tries to get out at the same time, which of course they cannot do. This is where a responsible Fed comes in and prepares the Bond Market for the inevitable Rate Hikes in 2015.

Read More: Low Rates and QE are Deflationary at the Zero Bound

Low Gasoline Prices are Inflationary in the Big Picture

The latest argument for inflating the bond market bubble has been the drop in oil prices indicating strong deflationary pressures but this is just a poor understanding of economic theory. High oil and gasoline prices are deflationary over the long-term whereas low oil and gasoline prices are stimulative for economic growth, and actually inflationary over the long-term. And I think the Fed economists are sophisticated enough to get this relationship, that in fact lower gasoline prices will add to GDP growth in the coming quarters, and put even more pressures on inflation with a transfer from the bad comps of energy prices year on year, over to other core components as this new found wealth by consumers in the form of a massive tax cut finds its way into other buckets like dining and retail expenditures, all of which have additive effects for the US economy. In short cheaper energy costs are a net positive for the global economy, it leads to more productive and sustainable economic growth.

Wages Starting to Spike

Watch out for wages, they have been bubbling under the surface for a while, slowly rising underneath everyone`s negative outlook on the subject, and with an ever tightening labor market this is the area to watch for real runaway inflation in the economy. A 0.4 % spike in wages for a month is something to take notice of, for example extrapolate this on an annual basis and 0.4 % adds up real quick to runaway inflation. So expect there might be a slight lag as consumers feel comfortable with the extra money in their pockets but eventually this money finds its way into other spending buckets so there should be a transfer from the energy component to the core inflation reading.

Oil Bubble Bursts, Next Up Bond Markets

It is obvious that there is too much liquidity in the financial system as essentially bonds and stocks are near their all-time highs at the same time, and oil would have been there too if it wasn`t for the fact that 7 years of QE artificially inflated high oil prices motivated a lot of people to start producing oil in the US and around the globe and we finally have an oversupplied oil market and essentially a price war to compete for global market share. The old adage there is no cure for high prices like high prices applies here. And there is no cure for low wages like low wages in a tightening labor market, and this is the inflation boogie man that is currently flying under the radar right now in financial markets.

Read More: Selling The Shale Boom: It's All About Reserves

US Economy Running Hot

An economy cannot add this many jobs in a year without market consequences, and so far the bond market has been able to do what it wants which is take advantage of cheap money and chase yield at any price without regards to downside risks. We are already seeing signs of the tightening labor market here in the US as employees are now quitting their jobs to take advantage of better opportunities in the labor market, this is all indicative of higher wages and increased inflation pressures in the economy for 2105.

Much Lower Oil & Much Higher Interest Rates as Lower Oil is Stimulative

The low oil prices means the Fed never raises rates argument is just flawed, look back in history of $30 a barrel oil, the economy wasn`t in a “deflationary death spiral” in fact it was quite robust and interest rates and bond yields were much higher by a large margin than these “Doomsday Recession Era” Rates that we currently have in the massive bond market bubble.

Read More: Solar in Oil Drilling:  Beat Them or Join Them?

All Bubbles Burst – No Cure for Financial Bubbles like Financial Bubbles

The only reason this bond bubble exists isn`t due to the lower price of oil, it is directly a result of too much cheap liquidity in the financial system and ridiculously low interest rates by central banks. Well the US economy by recent data points with 321,000 jobs created in a month, 0.4% monthly wage inflation, third quarter GDP revised up to 3.9%, Retail Sales Report up 0.7 % and lower gasoline prices adding additional stimulus to the US economy means the Fed will have to raise rates in bunches for 2015, and it is increasingly alarming that the bond market is as unprepared as a market can be going into this rising rate environment for 2015.

By EconMatters

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2014 Copyright EconMatters - 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.

EconMatters 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