donderdag 3 januari 2013

U.S. bonds hit 8 month low

U.S. bonds have finally broken down and from here on it's only going downwards as resistance is broken.

The funny thing is that Ben Bernanke has shot himself in the foot by telling everyone he's going to stop buying bonds at the end of 2013. The result, everyone flees U.S. bonds today. I guess Jim Rogers' call for a collapse in bonds was a hit right on the head of the nail.
The even odder thing we saw today is that the U.S. dollar went up 1% against the euro which is very contradictory. Normally the U.S. dollar goes down when the bond market goes down as seen in this correlation. So I think this is a temporary phenomenon. U.S. dollar strength won't last long with a weak bond market. Max Keiser is even predicting the end of the U.S. dollar in 2013. I think he's onto something.

If the Federal Reserve really were to stop buying U.S. bonds, bond yields would spike, mortgage rates would spike. The debt burden would increase tremendously with higher yields, which will bring interest payments much higher. If interest payments go higher, the budget deficit will increase when social security, defense, health care, education and pension spending isn't cut. Higher budget deficits asks for higher taxes to reign in the budget deficits and that will make stocks decline. That would lead to a start of a depression era.

You would think that the U.S. dollar would strengthen, but how can a currency strengthen with an exponentially higher debt burden and higher interest payments? It can't. First, the bond holders need to lose big before a recovery can even start. The only true safe haven will be precious metals.

2 opmerkingen:

  1. But gold does not believe this story today. I think maybe something is going on. That is, in the short term the economy is improving enough with PMI rising, unemployment falling etc - that bonds are pricing in future growth and inflation. If the economy slows down then Ben will need to step in and lower rates. And the market is very short term focused so this action can reverse if the employment rate rises tomorrow.

    1. That's just because the dollar went up 1%, so gold went down 1% as a result. Very normal.

      The market only believes the wrong thing, the dollar won't strengthen. You'll see when the debt ceiling is going to be set higher in a few weeks from now.