A Bond Bubble?

ByStander

Back in 2008 we wrote an article called “$60 A Barrel Oil” and at the time we were laughed at, ridiculed and pretty much told that we had NO idea how the world worked. Of course, this is when the price per barrel of oil was at $140.

We are now seeing the same thing now that we saw back then but this time it is in the treasury bond market. First, a huge caveat here, there is a difference with the bond market versus oil which is that the Federal Government is spending taxpayer dollars to support the prices of bonds to artificially keep interest rates low. This is not new news, they did this in all of 2009 which is what fueled the stock market rally.

However, the fear of the stock market my investors has also driven many stock market investors into bonds funds.



What the chart above is showing us is that historically the interest rate tends to run between two standard deviations to the downside and then move to two standard deviations to the upside. Sometimes, like during the credit crisis in 2008 and recently this can get stretched to the downside which makes the reversion to mean that much larger. In this case if we have a catalyst it could push interest rates back up to around 4% on the 10 year treasury. This would be about a 53% increase in the 10 year treasury.

Will this crater the stock market? Probably not. However, refinancing of homes will come to an immediate stop along with new home purchases and refinancing. Now, can you spell Home Price Decline? I thought you could.
This, of course, will most likely immediately send shivers through the market and will definitely further impact the slowing of GDP which with the latest Leading Economic Indicators out…that is all but in the offing as The ECRI Leading Indicator came in at 120.8 W/W, lower from a previous number of 122.4, revised from 122.0. In practical terms, this means that the annualized change is now back to a double dip predictive ‐10. Which is a deterioration from last week's actual ‐9.8. Well, not really ‐ the prior number was just revised to ‐10.2, meaning all those early chants of ECRI improvement were premature (just as we had expected, as this is merely becoming one more in the endless series of downwardly revised series to mitigate the negative data impact).
However, I am pretty much already preaching to the choir as retail investors are pulling money out of equities for the last 16 weeks running and that was even during the rally in July. The investor has all but pulled up stakes and left the table at this point.



This best part of the chart above is that it really shows typical investor behavior of buying at the tops (listening to the media versus doing their own homework) and panic selling at the bottoms. This is why the average investor makes VERY little money investing in the financial markets over time.
Bottom line – watch interest rates. A jump in interest rates could well spook the markets and kill more signs of any imagined economic recovery. What will cause rates to jump….don’t have a clue at the moment. It could be just about anything from a geopolitical event to simply a change in psychology.

quickcow

Another one.  waiting ....