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Outside the Box
April 2, 2010, 12:32 a.m. EDT · Recommend (3) · Post:
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Rise of the small I-banks never happened
By Howard Gold
NEW YORK (MarketWatch) -- Last week was pretty scary in the bond market.
Three auctions -- of two-, five-, and seven-year Treasurys -- flopped, as buyers, especially foreign investors, sat on the sidelines.
That triggered a huge sell-off in Treasurys, the world's most liquid fixed-income market.
Yields, which move in the opposite direction from bond prices, soared.
The yield on 30-year Treasurys briefly came within a hair of 5% before settling back to the 4.75% range. The ten-year note's yield hit 3.9%, driving 30-year mortgages, which are priced off that ten-year note, over the 5% mark.
All these rates are much, much higher than they were back in December 2008, when bond yields hit generational lows.
The poor auctions and subsequent dumping of bonds set off all kinds of alarms. Is inflation right around the corner? Are foreign holders of U.S. debt, the people we've counted on to keep financing our ballooning deficit, finally saying no mas? And is our low-interest-rate Nirvana gone for good?
My answers to those questions are: no, probably not, and probably.
I don't think inflation, especially hyperinflation, is anywhere on the horizon. And I don't believe foreign buyers are giving up on U.S. debt -- for many of them, it's practically the only game in town.
But in the wake of the crisis in Greece; rumblings about Portugal and other European countries; worried noises by rating agencies about the creditworthiness of the United Kingdom and the U.S., and last week's signing into law of President Obama's mammoth health-care reform bill, foreign and domestic buyers may well demand higher interest rates to compensate them for the perceived higher risk of owning U.S. government debt.
Last week's big surge in rates is also getting the attention of some savvy technicians who think we could be at a major turning point for bonds.
Pamela Aden, who with her sister Mary Anne edits the Aden Forecast, a technically-based advisory service that follows big trends in stocks, bonds, commodities, and currencies, says bonds are threatening to reverse trends going back nearly three decades.
She cites the following chart (reprinted courtesy of the Aden Forecast), which traces the yield of the long bond back to the Depression year of 1930:
As you can see, the yield on the 30-year Treasury peaked above 14% in 1981, then started a steady decline to its late 2008 low of 2.6%. It's rebounded since then, along with the economy and the markets, as fears of financial collapse faded.
But notice the dotted line on the chart, where the 80-month moving average sits. A moving average is simply the average of all readings for a particular data point over a certain period of time. Aden says the 80-month moving average captures long-term trends -- in this case, lasting nearly seven years.
That key moving average is at 4.65%, which the 30-year bond decisively broke last week. Aden sees that and the 4.75% level slightly above it as critical markers for the future of the bond market.
You may have never heard of Pali Capital, but its filing for bankruptcy protection on Friday underscores a truth about today's Wall Street power structure: bigger may not be better, but it's more durable.
2:44 p.m. Today2:44 p.m. April 2, 2010 | Comments: 7
- halvewitcantype | 11:13 p.m. April 1, 2010
"Jobs data has plenty of bad news to mar the good: Don't miss these Personal Finance stories. http://on.mktw.net/ddQlEL" 4:31 p.m. EDT, April 2, 2010 from MKTWCoombes
"Just. Doesn't. Get. It. RT @ProPublica Geithner's Letter Shows Opposition to Fixed Capital Requirements In Reform Bill: http://bit.ly/99pG1Y" 3:10 p.m. EDT, April 2, 2010 from davidweidner
"I just don't like blue cheese that much. Why can't I get that? Blue cheese: great for buffalo wings, not good for anything else." 2:07 p.m. EDT, April 2, 2010 from codywillard
"Drives me crazy how often I get blue cheese as an ingredient for my salad mix lunch and then spend lunch avoiding the blue cheese." 2:06 p.m. EDT, April 2, 2010 from codywillard
"OK..here is yet another NEW take (by me) on the inherent conflict in the iPad rollout. The reviewers! Read here: http://bit.ly/9vnarr" 2:02 p.m. EDT, April 2, 2010 from THErealDVORAK
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