U.S. Treasury Bond Market Sell Signal

By: Brian_Bloom

On reflection, the two weekly charts below should have been included in the equity market overview that I sent out yesterday (http://www.beyondneanderthal.com/equity-market-risks-are-rising-3/ ).

A significant “sell” signal has been given on the weekly bond price chart.

Theory says that the index should consolidate before heading down in earnest. Minimum target move is 152.5 - 137.5 = 15 points. Minimum target destination is 142.5 + 15 = 127.5 – which is where the index first gapped up in August 2012.

Looking specifically at the yield chart below, we see a mirror image, but without the gaps:

Target move is 34.5 - 25 = 9.5

Target destination is 32.5 + 9.5 = 42 (4.2%)

Note that a move to 4.2% will take the yield above its 200 week moving average.

Conclusion: The market is calling and end to the Fed’s game playing in respect of yields. Regardless of what Mr Bernanke may be saying, fundamental factors are now beginning to prevail. We can expect a 15/142.5 = >10% fall in the long bond price, which will translate to significant capital losses in the long bond market. In principle, the direction of bond prices in general is likely be down and capital shortages will be the likely result as lenders become risk averse. For various reasons the general rise in cost of capital will weigh heavily on the equity markets.

BB Comment: There are those who will argue that a rise in yields will evidence a coming era of price inflation and that, therefore, we can expect this inflation will drive equity and gold prices “up”. Yesterday’s equity market overview was intended to emphasise the dependence of corporations on rising sales volumes to drive rising profits on a sustainable basis. At this point in history, if corporations raise prices faster than they raise wages, then consumers will have less disposable income to afford to buy the goods and services that drive the economy. Therefore, if corporations raise prices they will likely experience falling sales volumes and the economy as a whole will contract. We are too early in the Kondrat’eff up-cycle for emerging technologies to drive “green shoot” revenues. The debt bubble needs to deflate as a condition precedent to future economic stability. Alternatively, a replacement “artificial” economic driver needs to be introduced. The last time that happened was in the 1930s, leading up to World War II. Time will tell whether humanity has evolved beyond reaching for the Neanderthal option of beating your enemy over the head with a club to get what you want. The evidence suggests not, but the optimists live in hope. They point to the tsunami of emerging technologies that has been building. They point to the Gross National Happiness Index in Bhutan and hope that it is the first emerging sign of a possible shift in human values. (See: http://www.grossnationalhappiness.com/ and http://www.grossnationalhappiness.com/wp-content/uploads/2012/04/Short-GNH-Index-edited.pdf )

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