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

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  218 Comments

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exiledbearTF
Mar 21, 2012 - 1:00am

I know on another forum long ago

If I can come up with some way to quantify everything, we might be able to formulate an index that would help us diagnose buy and sell signals.

A guy would tally up the word "crash", and the more times it was used the more bullish you should get. It worked pretty well, IIRC.

edAnt
Mar 21, 2012 - 12:36am

silver in Oz

Ant

I don't think these premiums are that out of line with other countries. Small purchases have high handling costs....

I buy from ABC Bullion in Sydney - the premiums are probably not too differernt from what you quoted.

In case you are not familiar with it, this webiste has a lot of info about buying silver in Australia:

https://forums.silverstackers.com/

Ed

Ant
Mar 21, 2012 - 12:29am

Thankyou

Thanks to Be Prepared and Crimson Avenger for their replies to my post in the previous thread. To answer you question re silver premiums, Crimson, in Oz , with silver being about $30 AUD, a single ounce of silver (or 1 ounce Kookaburra from the Perth Mint) is $40 AUD. Yet a ten ounce silver bar is $330. So I make that a 25% premium versus 10%. Which to me, seems a tad outrageous.

Turdle GGPining 4 the fjords
Mar 21, 2012 - 12:02am

Dead Parrot

I think TF means we buy little ones and sell big ones...

That would be unique

Mar 20, 2012 - 11:52pm

Great idea TF!

But just to be clear, I should buy when the site turns tits up? C'mon, someone had to say it!

Mar 20, 2012 - 11:43pm

Hey, Turdle

I think you're onto something.

I've noticed that sentiment on this site seems to bottom at roughly the same time that price bottoms. There's also a direct correlation between price bottoms and overall site traffic. If I can come up with some way to quantify everything, we might be able to formulate an index that would help us diagnose buy and sell signals.

We could call it the:

Turd's

Index of

Traffic and

Sentiment

Zoltan
Mar 20, 2012 - 11:35pm

Prayers for Katie Rose

Katie

I have stopped stacking as well (except for odd ounce for sentimental reasons).

I appreciate your contributions to the community. Best wishes to the goats and chickens.

I hope your past kindness is repaid in full by a factor of ten.

Your Karma proceeds you.

Z

Stock_Canines¤
Mar 20, 2012 - 11:31pm

Dear Mr Fantasy ~ Traffic

DrkPurpleHaze, I am working late tonight at the office and so I have been spending time at the SpeakEasy. One thing I know is you have impeccable taste in music. This song got me through a lot in the past, and Animals is perhaps my most treasured album. Listening to Dogs makes the job easier . . . Cheers

Turdle GG
Mar 20, 2012 - 11:13pm

Mantis

never used facebook or twitter - don't see the point

Turdle GG
Mar 20, 2012 - 11:12pm

Deciphering Ben's last paragraph

For our part, the Federal Reserve will continue to monitor the situation closely [PPT will not be taking any vacation days], work with our financial institutions [i.e. take JP Morgan's orders] and foreign counterparts [i.e. JP Morgan London office] to enhance the resilience of our financial system [we don't call them too big to fail for nothing], and be ready to use our tools [we have one tool, called a printer] to help stabilize U.S. markets [equity markets won't fall] should the situation require such action.

https://www.federalreserve.gov/newsevents/testimony/bernanke20120321a.htm

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