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Bond Collapse Continues
Trader Dan's Market Views ^ | Wednesday, March 14, 2012 | Dan Norcini

Posted on 03/14/2012 9:18:13 PM PDT by Razzz42

Much to the chagrin of the Federal Reserve, bond traders are taking that FOMC statement from yesterday and taking no prisoners as they literally hammer the long bond into submission. I find it a bit ironic (to be honest I am gleeful about it) that the Fed, which continues its attempts to manipulate hedge fund behavior by herding them into the equity markets, has opened an enormous can of worms and awakened the heretofore comatose bond vigilantes as an undesirable chain reaction to their "peachy" statement about the state of the US economy.

Bond traders are already moving the Fed Funds Futures to indicate interest rate hikes in early 2014, and not the latter part of 2014 as those minutes revealed yesterday. Worse, the yield on the Ten Year has spiked. It started off the week at 2.04% and ended today at 2.27%. As for the long bond, forgettaboutit; it was absolutely pummeled today now having dropped over 3 1/2 points the last two days.

What has happened is very simple - the happy talk about the US economy coming out of the FOMC minutes has traders jettisoning safe haven trades and even short term Treasuries in favor of the bull train leaving the station in the US equity markets. The problem? The last thing that the Fed and the US government needs or wants is a rising interest rate environment.

Oh sure, they can stand a bit of a move higher, but if any of this begins filtering into the mortgage market and the cost of home mortgages, autos, etc. begins moving higher, it will nip whatever nascent recovery there might be in the bud. And don't forget - there is that pesky "LITTLE" issue of the US national debt which will cost more federal tax revenue to service in a rising interest rate environment. Remember, even with its more upbeat assessment of the US economy yesterday, the FOMC certainly did not suggest that the recovery was robust or was it healthy. What they basically said, if I might paraphrase, was that it was showing modest improvement but was not out of the woods.

Doesn't matter - the bond market is focused on the "modest improvement" part and is interpreting that, either rightly or wrongly, that the Fed is not going to be doing any QE in the immediate future. After all, if things are supposedly so firmly on the right track, why the heck does anyone want to be in a "SAFE HAVEN" Treasury when everything is peachy keen, particularly if those paper IOU's are paying out squat.

The Fed has basically undercut it own low interest rate policy by giving investors the greenlight to sell bonds in order to deploy those funds into the equity markets. See what happens when you engineer a stock market rally?

I suspect that the Fed is going to be getting increasingly nervous if this sell off in the bonds, particularly the long end, continues unabated. Let's see how far the bond bears will push them.

TOPICS: Business/Economy; Government
KEYWORDS: bonds; interest; markets
For those not understanding why equities markets like the DOW and S&P continue going upward in tough economic times, have to remember how people think and react as they look for someplace to make money that beats the 0% rates on municipal bonds (states issued) and government paper like T-Bill, CDs, etc.

Private industry will keep pace or ahead of any inflation by just rising prices on their products for starters or they won't survive in this environment.

Any companies paying dividends of 1% annually would attract money now besides any rise in the future company stock price, would be a plus. Walmart, IBM, Intel are just a few dividend paying stock that come to mind.

Gold? If you have it socked away for a rainy day, it could start storming in the next couple years so just sit on it. If you can afford more, buy the dips, like today.

1 posted on 03/14/2012 9:18:20 PM PDT by Razzz42
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To: AdmSmith; AnonymousConservative; Berosus; bigheadfred; Bockscar; ColdOne; Convert from ECUSA; ...

Thanks Razzz42.

2 posted on 03/14/2012 9:25:23 PM PDT by SunkenCiv (I come to bury Caesar, not to praise him.)
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3 posted on 03/14/2012 9:36:25 PM PDT by Razzz42
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To: Razzz42

It’s about time the bond vigilantes awoke from their slumber. They sure helped put an end to the endless monetary growth of the Carter era.

4 posted on 03/14/2012 9:36:40 PM PDT by Pelham (Georgetown, Home of the Hoyas, Hos, and Flukers.)
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To: Razzz42

won’t rising interest rates put the brakes on a recovery.

financing the dedt could become difficult, eh

5 posted on 03/14/2012 10:43:08 PM PDT by blam
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To: SunkenCiv

According to the Treasury, we are currently paying about 2% interest - just 10 years ago it was ~5%. If we get back to that point, we will be paying over 600 Billion in interest. IOW, about the size of the Defense Budget or 1/3 of the entire budget.

The insanity must stop soon ...

6 posted on 03/14/2012 11:09:13 PM PDT by An.American.Expatriate (Here's my strategy on the War against Terrorism: We win, they lose. - with apologies to R.R.)
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To: An.American.Expatriate

it will stop soon. It’ll end with a crash..

7 posted on 03/14/2012 11:37:20 PM PDT by cableguymn (Good thing I am a conservative. Otherwise I would have to support Mittens like Republicans do.)
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To: Pelham
It’s about time the bond vigilantes awoke from their slumber.

Forthwith upright he rears from off the Pool
His mighty Stature; on each hand the flames
Drivn backward slope thir pointing spires, and rowld
In billows, leave i'th' midst a horrid Vale.
Then with expanded wings he stears his flight
Aloft, incumbent on the dusky Air
That felt unusual weight, till on dry Land
He lights, if it were Land that ever burn'd
With solid, as the Lake with liquid fire;

- Milton

8 posted on 03/14/2012 11:54:21 PM PDT by dr_lew
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To: An.American.Expatriate; backwoods-engineer

The problem with low interest rates is that capital formation dries up. That’s manageable given world trade and exporting countries with low wages (which is why China’s actually our bitch, rather than the other way around), even when politicians put local employers out of business via bills which are declaration of class warfare. Those are under the guise of “fighting pollution” (crock) “saving the environment” (crock) or “economic justice” (one of trust-fund Teddy’s favorite phrases).

9 posted on 03/15/2012 12:56:19 PM PDT by SunkenCiv (I come to bury Caesar, not to praise him.)
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