Bond and note prices are once more falling today marking a continuation of the pattern that commenced on Tuesday, when traders/investors interpreted ECB President Mario Draghi’s comments as a sign that Central Bankers are prepping the markets for an end to bond buying programs and other forms of monetary stimulus.

On Wednesday that was followed by BOE and BOC presidents suggesting the same.

As we noted in yesterday’s comments – traders are taking this as a strong signal that the floor of support beneath bond prices – a floor that has prevented them from falling sharply with the result of rising interest rates – is now getting ready to crack.

Take a look at this chart of the 10-year Treasury. It’s yield hit a one month high today.

Again, this is no fluke occurrence – it is the direct result of the market’s response to these Central Bankers and the growing sense that the days of ultra low interest rates are coming to a close.

Sentiment shifts never announce themselves by the ringing of a bell. They have to be discerned through close observation of price action ( charts) combined with real-world events that influence the thinking of investors and traders.

It is too early to say that the markets will not move back towards a bias for the long side of bonds – not with all the geopolitical uncertainty and especially the unsettled nature of things here in the US, but interest rates at a one-month high are something that one cannot ignore and chart breakdowns must be respected, even if it is at the risk of reversing. One never knows when a trend is going to start so you act on the signals you get and then see how the trade performs.

Having said all this, it is my view that we will see buyers step into these bonds if rates rise much higher as there will be a category of investors who will welcome the higher yields and will want to lock in those yields in their portfolios, especially at a time in which valuations of stocks in certain sectors are considered somewhat lofty. That should keep the bonds from completely unraveling and serve to provide a downside floor, although at what level I am yet unclear. For right now, bonds are negative on their charts.

While hedge funds had spent the last few weeks of May and into early June covering shorts, they look like they are coming back to the short side once more. That shows the sentiment shift.

Look at how this shift in sentiment is manifesting itself in the yield curve. The spread between the 10-year and the 2-year, which I use as a proxy for the entire curve, has jumped 7 basis points this week. While it remains at low levels, that is a decent sized move in such a short period of time. This cannot be ignored.

It is for this reason that Financial stocks are putting in strong performances this week.  It is also the reason that interest rate proxies such at the Utility sector are suffering and the reason why the Safe Haven Yen and gold are seeing selling pressure.

Let me interject yet another note to state how utterly witless and predictable the drivel that we are seeing coming  from the Gold cult RA-RA sites  who claim to have found an airtight case of Central Bank gold manipulation because the metal and the Yen are moving in lockstep. This is the sort of idiocy that comes wrapped in seemingly astute observation but then draws all the wrong conclusions with the result that it only serves to hopelessly muddle the brains of those who cannot pull back far enough to examine the larger picture of the markets and how they are integrated.

The problem with that cult – and make no mistake about it for that is exactly what it is –  is that they start with an assumption that gold is manipulated all the time by the governments of the West. If it does not constantly rise there can only be one reason – governments of the West are deliberately pushing it lower.  Once embraced, that then colors every single thing they see. There is simply no way for these poor dupes to see the truth because their objectivity is gone. While it may make for a prosperous livelihood for the people peddling this junk, it only serves to impoverish those who are victimized by it since they cannot discern when true shifts in sentiment are taking place and react accordingly.

We have well documented here both on the charts and in commentary, how the gold price is moving with the yield curve and how that in turn is reflected in the action of the various major currencies. It is all about traders/investors trying to gauge sentiment and position themselves in the proper direction for an anticipated move. As a general rule, we have seen interest rates fall, gold rise and the Yen rise when traders are uncertain and are moving towards safe havens and away from risk.

One simply cannot argue with the simplicity of this comparison chart.

Same thing goes for gold mining stocks.

To believe the nonsense from the gold cult false prophets, one has to suspend credulity and embrace the notion that these “evil” Central Bankers are simultaneously forcing interest rates higher, orchestrating selling in the gold mining shares, orchestrating selling across the Utility sector, orchestrating buying in the Financial shares, orchestrating selling in the Yen, orchestrating a steepening of the yield curve and a widening of the TIPS spread while investors world wide, are all wanting to do the exact opposite!

Ah Yes, investors right now are all clamoring to buy the Utility sector, sell Financial shares, flatten the Yield curve to road-pizza levels, ,jam the Yen into the stratosphere ( along with gold of course), depress the TIPS spread, etc. but are being prevented by the Central Banks of the West from so doing. And how are the Central Banks of the West doing this? Why they are sending out their leaders telling the markets that in their view economic conditions are slowly improving and that it might be time to begin pulling back on their unprecedented bond buying programs!

Do you see how utterly stupid these witless theories are that constantly spew forth from the gold cult sites? They are like vapors that emerge from a cesspool and infect all those who unwittingly pass by.

They are still stuck in the exact same mindset from a decade ago! That is the real tragedy here. And yet, the stuff continues to find willing victims to embrace it only guaranteeing to themselves more lost opportunities and more investment losses.






Comments (4)

dyperhead – If I had only the copper chart to go off of I would say, yes, risk money would be coming into the commodity sector in anticipation of increasing demand tied to economic growth prospects being revised upwards.
The problem is that the equity markets are shaky.
The various commodity indices that i track are showing some strength of late at the same time the bonds are showing weakness so that is a sign of traders expecting higher demand from increasing economic growth.
I guess the big question is whether or not the economy, and the indebted governments of the West, can handle higher rates ( borrowing costs).
If the market starts to think that they cannot, then the upside for commodities in general will be limited.
I honestly do not know how this is going to sort out. I would feel LOTS BETTER if we could see a tax reform package enacted into law. That would boost the entire commodity complex, especially copper and copper miners., Then if we got an infrastructure package, it would boost it further as well as helping steel stocks.

Leave a Reply