Keep Watching The Bond Market

218
Tue, Mar 20, 2012 - 11:21am

The past week has seen some rather sharp selloffs in the U.S. treasury market. Is "Operation Twist" failing? Will we soon see a resumption of overt quantitative easing?

Diligent Turdites will recall that we've been discussing this possibility for months. For me, the key to correctly anticipating the resumption of overt QE is found in watching movements of long-term interest rates. As often stated here, The Federal Reserve cannot allow interest rates to rise. Keeping rates low and funding the federal budget deficit are the two, primary goals of quantitative easing. Therefore, dropping bond prices (higher interest rates) signal that more QE (Fed buying on bonds) is necessary.

Well, what to make of these charts? We know from reviewing the long-term charts of the 10-year and the Long Bond that previous drops in price preceded the announcement of QE1 and QE2. We're almost there again. The 10-year is now perched precariously above the all-important 127.50 level and the Long Bond just had it's initial test-and-hold of support at 135. Note that, prior to these latest drops, the bond and the note had been in rather tight ranges since the Fed began "Operation Twist" in September of last year.

With bond prices being near these critical levels and having gotten there so quickly, we almost have to expect a rally here. The question then becomes: What happens next? I'd expect 127.50 and 135 to hold for a while longer but, if those levels fail, QE3 should be right around the corner. Already, there are some folks out there who think that The Fed will announce QE3 in April or June. https://www.zerohedge.com/contributed/2012-10-05/probability-map-morgan-stanleys-vincent-reinhart-still-says-75-chance-fed-qe3 If rates keep rising, those pundits will be proven correct.

The current beatdown in the metals began inexplicably last evening. Whenever you see gold drop seven or eight bucks, out of the blue, on no news, at 9:00 pm EST, you know that a raid is coming. Lo and behold...we got one. Gold reached all the way down to $1640 overnight and silver touched $32. That the selloffs ended there should be no surprise to anyone as those are currently our two main, short-term support levels. For now, the pressure is off but there's really no reason to get excited just yet. The metals remain in their recent ranges. Gold between $1640 and $1670, silver between $32 and $33. Once the metals pop UP and out of those ranges, the bottoms will be set and we can begin to get excited again. Until then, I'm waiting patiently just in case one more leg down toward $1625 and $31 develops.

I hope you have a fun and stress-free Tuesday. TF

About the Author

Founder
turd [at] tfmetalsreport [dot] com ()

  218 Comments

ink
Mar 20, 2012 - 2:03pm

Bonds

10 year note currently at 127.75

ivars Number 47
Mar 20, 2012 - 2:06pm

@Number 47 Apple

Excellent Google/Apple overlay. Just confirms that crash is not far away no high up away. And first wave will bring it back to 500. What happens later-we shall see as Google got caught up in 2008-2009 selloff.

kazooclown
Mar 20, 2012 - 2:06pm
Stock_Canines
Mar 20, 2012 - 2:09pm

Long-Time Reader First Time Poster

Hello all, I have enjoyed and learned a lot from this site and have followed Turd going back to the blogspot days. I purchased my first bullion last year and have amassed a small stack. In addition, I own a few mining shares. I check this site, along with some others, daily and consider tfmetalsreport a key ingredient to my ongoing education.

I think it is human nature to constantly re-evaluate and reconsider your own assumptions and to question your investment strategy routinely. I am currently in the midst of a serious re-evaluation. I understand and have come to agree with the conclusion that gold and silver do not trade freely. I believe certain powers want to maintain the appearance of normalcy and functionality in the system so has to manage the population. I also understand that the country and much of the developed world is awash in debt. However, in acknowledging these things, I still have increasing doubts in my strategy.

I know most here do not believe any of the numbers put out by the government, but the economy does appear to be improving. I see it every day where I live. Houses are selling, people are getting hired, friends and family are receiving raises and promotions, the markets are zooming, and there is a general far more upbeat sense to the people I interact with. It might all be some constructed master plan emanating from the bowels of Wall Street and DC, but none the less, the economy is improving. Many people who's opinion I trust and value, people like my 80 year old father who worked in business for 40+ years and has a very sharp mind, all agree that the US is facing some real hurdles and challenges, but they in no way think that it is all going to just come crashing down around us. They absolutely fail to see that the US, although it may be mired in some tough economic waters, is suddenly going to experience a collapse of its currency, Weimer style hyper-inflation, or some other system wide failure. They almost unanimously believe your best investment decision would be to buy dividend paying large companies with international exposure. I, of course, thought I was smarter and was on to a new paradigm of a surging gold and silver bull market. My plan was to buy mining shares and, more recently, bullion. I have to say, I would have been far better off listening to the people I value that have been around for 60/70/80 years. The past is moot, but going forward will I be proven right or am I a) wrong about my assumptions/conclusions, or b) will the system maintain itself for a long enough time period that the economic/financial issues begin resolve themselves.

Is it impossible to believe that the US will struggle its way through the economic and financial battleground only to emerge on the other side still intact?

Even if the US suffers from high inflation from endless QE, who is to say that the paper price of gold and silver ever reflect the reality of the situation. Why believe the mining companies share prices will earn a return commensurate with the risk of the sector?

Here we are at DOW 13000, and the mining sector has been beaten senseless. Many are calling for a correction. If the over correction comes, won't mining shares just get beaten worse? Yet, if the markets inexplicitly continue their trek north, it doesn't appear the mining shares will follow. I am beginning to think the mining shares will only do well if gold crosses 2000, but that now appears to be far from certain. I think the overt QE needs to be announced to give gold and thus the miners a kick in the pants, but I just don't see that happening unless there is a severe correction in the markets. If there is a severe correction in the markets, as I said, the miners and paper gold price will likely suffer significantly.

I have gone on way too long and in thinking about how to summarize my first post on this site, I guess my struggle is simply this. If gold never gets above $2000 precisely because it is a manipulated market and there is an increasing likely hood that the economy is improving (not to mention the bull market is 16 years in the making – a long time by any standard), my upside at these prices is significantly limited. As insurance, bullion is great, but for that play to pay though I am counting on a collapse and that is just something I don't foresee happening. If it does, well great I have some gold, but I certainly won't be happy about it. Second, with mining shares, I don't see the return (at least since I have been investing in the sector since 2007) being commensurate with the extraordinary risk. I guess, in conclusion, I am beginning to have serious doubts about my investments in bullion and mining shares. I think perhaps those older and wiser than I were correct.

FreedomWins
Mar 20, 2012 - 2:10pm
Mickey
Mar 20, 2012 - 2:10pm

@zilverman

I agree on the formal QE sooner rather than later--mortgage rates moving up--short term help to housing as people rush to buy homes and lock in rates.

Most here are young and do not remember 1980--nothing was sellign when rates rose--now rates are low and beginning to rise--whats gonna happen to housing, autos, business?

And of course the banks which wil put the most pressure on becasue of their sure thing of borrowing at ZIRP and investing in 10 years at 1.9% now 2.3%--and of course the price decline of probably over 3% over the last 2 weeks.

If you have not been in this before rates started to decline in 82 you do not understand how little a 1.9% coupon is when rates start increasing.

Hence they are going to have to step in sooner rather than later--unless of course they do MORE covertly and of course if the lies continue (see the golden truth for todays post).

Keep your eye on the long term ball and understand Richard Russells mantra from 11-12 years ago : Inflate or die.

He know what was going to happen. Many years experience told him.

and all the honest hard working folks who invested in say the 10 year more concerned about return of principal--?? they are going to get burned again by Fed which maintains low rates. The retirees are the ones getting screwed right now-they saw their equities decline from 2000, now they switch into safe bonds and will see that decline. And prob they wil be buying PM when its higher

recaptureamerica
Mar 20, 2012 - 2:19pm
kazooclown
Mar 20, 2012 - 2:22pm

stink short 49.4 stop 50

this is going to dump

Mar 20, 2012 - 2:26pm

This commentary is about 18

This commentary is about 18 months old but still relevant and quite interesting. A good use of your time:

https://www.theatlantic.com/magazine/archive/2010/09/the-point-of-no-return/8186/?single_page=true

Velocity TF
Mar 20, 2012 - 2:31pm

Thanks Master Turd...

..for the generous answers and good to hear the Subs' site will have some downside action built-in (at last)... progress :)

Regards your reply, "in this platform.. stackers should rarely, if ever, be looking to reduce their stack and sell" i agree 100% as a stacker myself. We're not selling, we're stacking.

What are we looking for is the dips not the rises... you recall the "BTFD" mantra don't you?

Stackers are ecstatic to see dips but we've been spending all our time on hopium just looking to the upside (Hold & Hope strategy, not BTFD strategy).

Instead of "The Battle Royale" being a major opportunity looking for an establishment smackdown with great excitement Turdville was on hopium for a further rise. The same 'Only Up' strategy pushed religously by the KWN rampers (and Jim Sinclair) for some reason

Silver's down -3.10% ..looking very crap coz we weren't looking for the dips (?)

Finally regards, "the end of the Great Keynesian Experiment" that's a Govt policy, not what we're seeing. We're seeing the end of the 'Great Government Experiment' which with its collection of parasites in Govt and the global parasites behind Govt (banksters, corporate crooks, global oil etc) has once again destroyed America, most of Europe and Japan.

It's a problem of an institutionalised monopoly (ditto The Feds monopoly on money) that's sucking whole countries dry of their wealth and wrecking economies in country after country, decade after decade, for thousands of years.

It's not 1 policy that's killing society, it's Government

Subscribe or login to read all comments.

Contribute

Donate Shop

Get Your Subscriber Benefits

Private iTunes feed for all TF Metals Report podcasts, and access to Vault member forum discussions!

Key Economic Events Week of 8/19

8/21 10:00 ET Existing home sales
8/21 2:00 ET July FOMC minutes
8/22 9:45 ET Markit Manu and Svc PMIs
8/22 Jackson Holedown begins
8/23 10:00 ET Chief Goon Powell speaks

Key Economic Events Week of 8/12

8/13 8:30 ET Consumer Price Index
8/14 8:30 ET Retail Sales
8/14 8:30 ET Productivity & Labor Costs
8/14 8:30 ET Philly Fed
8/14 9:15 ET Ind Prod and Cap Ute
8/14 10:00 ET Business Inventories
8/15 8:30 ET Housing Starts & Bldg Permits

Key Economic Events Week of 8/5

8/5 9:45 ET Markit services PMI
8/5 10:00 ET ISM services PMI
8/6 10:00 ET Job Openings
8/8 10:00 ET Wholesale Inventories
8/9 8:30 ET Producer Price Index

Key Economic Events Week of 7/29

7/30 8:30 ET Personal Inc/Spending & Core Inflation
7/30 10:00 ET Consumer Confidence
7/31 8:15 ET ADP employment
7/31 2:00 pm ET FOMC Fedlines
7/31 2:30 pm ET CGP presser
8/1 9:45 ET Markit Manu PMI
8/1 10:00 ET ISM Manu PMI
8/2 8:30 ET BLSBS
8/2 10:00 ET Factory Orders

Key Economic Events Week of 7/22

7/23 10:00 ET Existing home sales
7/23 10:00 ET Richmond Fed Manu Idx
7/24 9:45 ET flash Markit PMIs
7/25 8:00 ET Count Draghi/ECB policy meeting
7/25 8:30 ET Durable Goods
7/25 8:30 ET Wholesale Inventories
7/26 8:30 ET Q2 GDP first guess

Key Economic Events Week of 7/15

7/15 8:30 ET Empire State Fed Index
7/16 8:30 ET Retail Sales and Import Price Index
7/16 9:15 ET Cap Ute and Ind Prod
7/16 10:00 ET Business Inventories
7/17 8:30 ET Housing Starts and Building Permits
7/18 8:30 ET Philly Fed
7/19 10:00 ET Consumer Sentiment

Key Economic Events Week of 7/8

7/9 8:45 ET Fed Stress Conference, three Goon speeches
7/10 8:30 ET CGP Hump-Hawk prepared remarks
7/10 10:00 ET CGP Hump-Hawk House
7/10 10:00 ET Wholesale Inventories
7/10 2:00 ET June FOMC minutes
7/11 8:30 ET CPI
7/11 10:00 ET CGP Hump-Hawk Senate
7/11 12:30 ET Goon Williams
7/12 8:30 ET PPI

Key Economic Events Week of 7/1

7/1 9:45 ET Markit Manu PMI
7/1 10:00 ET ISM Manu PMI
7/1 10:00 ET Construction Spending
7/2 6:35 ET Goon Williams
7/3 8:15 ET ADP June employment
7/3 8:30 ET Trade Deficit
7/3 9:45 ET Markit Services PMI
7/3 10:00 ET ISM Services PMI
7/3 10:00 ET Factory Orders
7/4 US Market Holiday
7/5 8:30 ET BLSBS

Key Economic Events Week of 6/24

6/25 10:00 ET New Home Sales
6/25 1:00 pm ET Chief Goon Powell
6/25 5:30 pm ET Goon Bullard
6/26 8:30 ET Durable Goods
6/27 8:30 ET Q1 GDP final guess
6/28 8:30 ET Personal Income and Consumer Spending
6/28 8:30 ET Core Inflation
6/28 9:45 ET Chicago PMI

Key Economic Events Week of 6/17

6/18 8:30 ET Housing Starts and Building Permits
6/19 2:00 ET FOMC Fedlines
6/19 2:30 ET CGP presser
6/20 8:30 ET Philly Fed
6/21 9:45 ET Markit flash June PMIs

Recent Comments

Forum Discussion

by Scarecrow, 18 min 32 sec ago
by Scarecrow, 38 min 31 sec ago
by Scarecrow, 1 hour 41 min ago
by Scarecrow, 3 hours 3 min ago
by Scarecrow, 3 hours 11 min ago
by Scarecrow, 3 hours 26 min ago