BONDS SOAR
By Carl Swenlin, Decision Point
The actual “soaring” for bonds began last July when bonds began an advance of about 33% in two months. After a five-month period of consolidation, another up leg advanced prices about 18% off the bottom of the trading range, making a total advance of about 41% since last July.
This surge was a big surprise to most people, including us, because we wondered why anybody would want to lend money to a country so deep in debt and which was borrowing 42 cents of every dollar it spent. The answer is that the U.S. is the least pathetic of the world’s debtor nations. I have this picture of the sinking Titantic where one end of the ship is lower in the water than the other end, and people are moving toward relative safety on the high end of the ship. The trouble is that we’re all in the same boat and the whole ship will ultimately be under water. It reminds me of an old pilot’s joke. Question: What is the first indication that you have flown into the side of a mountain? Answer: You lose pitot-static pressure. (The pitot tube is that pointy thing that sticks out of the nose of the airplane, and would be the first part of the airplane to make contact with the mountain.) But I digress.
This week TLT punched through the top of a long-term rising trend channel and moved to new, all-time highs. We can see on the weekly chart that price movement is nearly vertical. The PMO is rising and has plenty of room before it reaches the overbought level of its trading range. The picture is very positive, but another period of consolidation will probably begin soon.
As for the upside potential of bonds, let’s take a look at interest rates, which, of course, move in the opposite direction of bonds. In 2009 rates hit their lowest point in over 50 years, and that low is now close to being challenged. We think that rates have the potential to dip down to 2% (the low in the 1940s) and possibly lower. With that in mind, we would guesstimate that bond prices have the potential to move around 20% higher.
Conclusion: Our timing model has us on a buy signal for bonds because the model is driven by prices, not our perfectly rational (but wrong) view of what bond prices ought to be doing. Also, the technical picture for bonds is excellent, although there is probably some correction or consolidation not too far ahead.
11 Comments
At the current (and longstanding) rate of drop in 30 yr Treasury yields, the yield should hit zero in about 10 years. At what point do you expect this trend to reverse direction to a flat or up cycle?
One of the news outlets points out that Treasuries are rising because they are the only “good collateral” out there. European banks are purchasing them up as the only “money good” asset out there. The Federal Reserve should have used this as an opportunity to sell some of it’s QE2 purchased treasuries.
These European buyers of treasuries have made such good decisions up to now – what could possibly go wrong. I agree. I was thinking what a great opportunity for the Fed to slowly but surely dump long-term treasuries to these suckers.
We keep repeating the same policies. Gold is the obvious purchase until those in power change their mode of dealing with this “crisis”. The Fed, under the current leadership of Ben Bernanke et al, can and will just keep goosing and printing. The day that stops – (a Romney victory?) – treasuries are over. Given the financial realities of the USA and the train wreck that is approaching, one wonders if purchasers of its 30 year debt are taking crazy pills. “Least pathetic”? When it comes to lending your money – do you really want “least pathetic”? Makes no sense.
“The answer is that the U.S. is the least pathetic of the world’s debtor nations.”
Canada? Hello?
“The PMO is rising and has plenty of room before it reaches the overbought level of its trading range. The picture is very positive, but another period of consolidation will probably begin soon.”
There it is, folks. The hedge. These types of articles are so funny. It could go up, but, it could go down or sideways too. Gee, thanks.
See, it’s impossible to not hedge when the truth is that you have absolutely no idea where any market is going. Did Swenlin predict this massive move in long-term treasuries? Did he advise his readers a short while ago to load the truck with them? Nope.
Snakeoil. Period.
Here is something from Richard Russell
http://www.financialsense.com/contributors/richard-russell/warning-bear-market-in-progress
AWF is looking for “Support” in the 1260-1278 range S&P500
If no IMMEDIATE “Support” can you say “Shit thru the Goose”
Bear markets resolve over time 6/10 months is normal–minus Fed/Gov intervention
1. The more money the FED “”prints”" the more rates go down. But the more rates fall the worse the damage will be when (NOT IF) rates start to rise (inevitably).
2. Rates in the Netherlands and Germany are falling as well. Keywords: “Current Account Surplusses”".
3. Surplus foreign/European demand is far too small to bridge the gap between the Trade Deficit ($ 600 bln.) and the US federal budget deficit ($ 1900 bln.).
It’s clever hoew you make one true statement along with 4 or 5 BS ones all to try to make your comment pass as right, or smart. But your comments are like my 3 year old who insists Adelles “Rumor has it” is Rumor haszell. She likes it her way and refuses to listen to reason.
This situation isn’t all that shocking – you only need to look at Japan as a guide. We’ll probably have another 2-3 years of record low interest rates unless something dramatic changes, so continued strength for bonds is likely. Where else are people going to put their money? The over priced stock market?
I see lots of gnashing of teeth over “money printing” but’s it’s clear that the real concern is lack of growth. That choice to “print” is made not by Bernanke but by Congress and all of us who don’t want our taxes raised, our retirements delayed, or to miss out on filling our SUV or buying cheap crap from China.
Ted, the problem is the cheap stuff from China turns out to almost all be good, by no way ‘crap’. Until US salaries go lower to compete with Asia we will not have growth. But then our lower purchasing power would set a limit.
Sure, but where do you draw the line? Currency manipulation aside, there’s always going to be cheaper labor in this world – do we really want to spiral down to try to compete with it? I think you can still have growth through investment and higher productivity without a race to the bottom in wages. I guess my larger point about China was that we are perpetuating a large trade deficit and not taking the steps to re-balance it.
What bothers me is this desire to find a scapegoat in Bernanke when people and the politicians they elect have been unwilling to make the tough decisions to move toward a more balanced, sustainable economy. If I just call politicians “crooks” and the Fed “evil” then I don’t have to take responsibility for how my individual actions could be hurting the country.
$1 per hour living 8 to a dorm room at foxconn. No, we will never compete with that.