Update on Bonds: Jun 4, 2015

We posited yesterday that after over a year of constant bond market manipulation (the latest instance), TPTB had broken the link between lower interest rates and lower stock prices.  It was a strong positive correlation that we wrote about quite some time ago in forecasting a stock market correction (that obviously never happened.)

2015-06-04 TNX weekly 20yrThat correlation worked both ways insofar as rising interest rates were often (but, not always) a sign of a recovering economy and, hence, stock market rally.  The correlation broke down altogether in early 2014 when interest rates fell, but stocks continued soaring.2015-06-04 TNX wkly 2007-15We wondered whether it would, thus, be difficult to reestablish the correlation (or, at least the perception thereof) in the event that rates started rising.  There are about 18 trillion reasons to think it just might be a challenge.

As even former Fed presidents have admitted, a return to normal interest rates is not an option — not with $18 trillion nominal in federal debt outstanding.  We might be able to manage as long as the FOMC buys all the bonds in sight, keeping interest rates below 2-3%.  But, a return to the long-term 10-yr note average of 6% would surely bankrupt the US.  Japan and the eurozone would be right there with us.

Janet Yellen keeps talking higher interest rates because there’s this illusion that higher rates are evidence of a healthy economy.  But, with this much debt outstanding, higher rates would mean impending disaster.

With that cheery thought, we present a simplified daily chart — showing that 10-yr note yields have tested and been rejected by the midline of the 20-year old falling white channel.

2015-06-04 TNX daily 1222As Lawrence Lindsey ominously states in the above-reference discussion:

“…the Fed has almost no credibility when it comes to a sense that they will be able to stay on top of this ticking monetary bomb.”

With SPX reaching our next downside target [Charts I’m Watching: May 26] earlier today, we can’t help but agree.  For today’s updated equity forecast, see: Unintended Consequences.


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