Bonds

Backtalk From The Bond Market

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BACKTALK FROM THE BOND MARKET

Investors keep looking to the Fed for supposed “forward guidance”. They are looking in the wrong place. Since mid-December, bond prices have declined another 5% and are currently at new 52-week lows. Here is an updated chart of U.S. Treasury Bond ETF (TLT)…

U.S. Treasury bond prices have now declined 16% since the Fed announced a reversal in its interest rate policy and the first rate cut last September. The latest weakness comes in the face of a second rate cut, so it begs a repeat of the question I posed last October…
“Why are bond rates rising at the very time the Fed is trying to move interest rates lower?” (Fed Cuts Rates But Bond Rates Are RISING)
Subsequently, the Fed announced a second rate cut, but the announcement lacked the conviction that inflation is under control and that multiple rate cuts could be expected for 2025.
I don’t so much think the Fed has suddenly had a change of heart. The situation is precarious and the cumulative effects of more than full century of money creation (inflation), mis-management, and manipulation have evolved into a game of playing catch with a ticking time bomb.
Former Fed presidents Greenspan, Bernanke, and Yellen all know this and have kicked the can down the road. Jerome Powell was likely aware of the ongoing threat of a catastrophe from which there is no return. The opportunity to be “numero uno” for a season, however, must have displaced any fear of presiding over a credit collapse and economic depression.
THE FED’S DILEMMA

The Federal Reserve doesn’t know what to do; but it probably doesn’t make much difference anymore.

A dilemma is “a situation in which a difficult choice has to be made between two or more alternatives, especially equally undesirable ones.” (New Oxford American Dictionary)

We are hooked on low interest rates and the drug of cheap and easy credit. Maintaining low interest rates furthers that dependency and heightens the risk of overdose. The result would be a swift and renewed weakening of the U.S. dollar accompanied by the increasing effects of inflation.

On the other hand, raising interest rates more could trigger another credit implosion which could lead to deflation and a full-scale depression.

Doing nothing is an option. The problem is that the Fed is holding that “ticking time bomb” and doesn’t know how long it will be until its world blows apart.

WHAT TO EXPECT NEXT

Don’t trouble yourself worrying about who the next Fed chair will be. It doesn’t matter. It is too late in the game for a change to have any meaningful impact. This includes speculation that Judy Shelton might get nominated again. Yes, she is an excellent choice; and, for all of the right reasons.

Unfortunately, that would expose the game of chess being played by the Federal Reserve and its owners. (see Federal Reserve – Conspiracy Or Not? and Federal Reserve vs. Judy Shelton)

The worst possibilities come after something big happens. The Federal Reserve and the U.S. government will work together to stave off any possibility of loss of control. That means that everyone – investors,  traders, citizens, communities – will be subject to a host of new economic and monetary regulations, restrictions, executive orders, etc.

It will be like nothing we have seen in the past and beyond anything we can currently comprehend. (also see Bond Investors To The Fed – “Not This Time”)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

 

Global Credit Collapse Is Deflationary

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NOTE TO READERS:  “Global Credit Collapse Is Deflationary” was originally published as an exclusive for TalkMarkets on October 29, 2024. I have not changed anything in the article, nor is there any reason to modify or alter what is written below because of U.S. election results.

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Treasury Bonds Update

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TREASURY BONDS

There is an important Treasury Bonds update you should know of. There must have been poison gas inside the Treasury Bond price balloon. It appears that bond traders were overcome with it and lost consciousness while still at their desks with their fingers on the sell key.

We know there are buyers for all sellers, of course; but, at what price? Equilibrium in the bond market is like a fantasy mirage in the middle of a desert sandstorm – it is nowhere to be found. Here is the latest chart (source) for TLT, the 20+ Year Treasury Bond ETF…

Treasury Bonds Update Chart

The chart covers trading activity for the past two weeks beginning with Monday, September 25th, and ending with Friday, October 6th.

During those ten trading days, TLT losses totaled almost eight percent. For anything other than U.S. Treasury bonds, that might not seem so bad, but…

These are U.S. Treasury bonds. They are a long-term version of the same securities that are considered a standard for “risk-free” investments – U.S. Treasury bills.

Yes, we know that a longer maturity has more exposure to interest rate risk. Even allowing for an understanding of that risk, though, doesn’t provide much consolation when you watch a “safe”, AAA rated, income-oriented investment that promises to pay interest annually and all your money back at maturity, go up in smoke.

Let’s not forget the “full faith and credit of the United States government” behind those bonds. That should make anyone feel comfy and secure.

BLOODLETTING OR BLOOD-DRAINING? 

It took four decades for the Federal Reserve to engineer interest rates downward to near zero from north of 15% on the very same U.S. Treasury bonds that currently yield 4.7%.

In order to return interest rates to something more historically normal (we’re not there yet), we have endured three years of money destruction.

The past two weeks have accelerated the bloodletting process and the patient may not get a transfusion.

CONCLUSION

In conclusion, this is the summary of the treasury bonds update.  The drop in U.S. Treasury bonds continues. The percentage drop in Treasury bond prices since 2020 now totals more than 53 percent.

The effects are felt in all markets, including auto loans, mortgages, retail consumer credit, etc.

A credit collapse (think 2008) is a very real possibility and so is a washout in stocks. No one is immune. Just ask Silicon Valley Bank.

Things will get worse before they get better; a lot worse for a lot longer.

(also see Bond Market Tells The Real Story)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!