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Last week the market’s celebration surrounding the partial Fiscal Cliff agreement was cut short by a surprise from the minutes of the Fed’s December meeting. You see most had expected the minutes to be a relative non-event …
But showing you can’t ever take anything for granted in the markets, the minutes offered details of a surprise rift in the FOMC about when to end its current quantitative easing program. In particular, this paragraph shook markets:
“In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases. Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.”
Previously it was thought that the Fed would keep their QE program through the end of the year. And while this isn’t a declaration that QE is going to end imminently, the minutes were particularly surprising to markets because no one thought ending the current QE program was on the Fed’s mind, much less being openly discussed and argued about.
The surprise news, combined with the positive sentiment emanating from the fiscal cliff deal, sent Treasury yields to seven-month highs. As you can see in the chart below, the 30-year Treasury yield jumped to 3 percent for the first time since late April.
[Click chart for larger version]
This is important not so much because of what the Fed minutes revealed (we all know at some point the Fed will remove accommodation) but instead how the market reacted.
The market reaction to this news was pretty violent. And the sharp selling that hit Treasurys (and spiked yields) is yet another sign that the top is “in” in the bond market. Now the question you should be asking isn’t so much, “will bond yields rise” but instead “how fast and how far will they rise.”
Four-plus years into unprecedented Fed easing, last week’s price action in response to the Fed minutes tells me that markets are accepting the fact that we are closer to the end than we are to the beginning. And as such they are starting to anticipate rising interest rates.
Bond yields have already moved to multi-month highs based on the perception that the Fed may dial back QE sooner than expected. So we can only expect yields to accelerate once it becomes clear that the Fed is actually goingto remove QE from the markets — something that by the Fed’s own admission could start much sooner than is the general consensus.
Yields have been kept low by the Fed’s mass bond-buying program, and by their safe-haven status as a series of crises threatened elsewhere. But once the QE punchbowl is removed, holders of long-term bonds could take a beating. I hope you’re not one of them.
Best,
Tom
Weiss has been calling for a blood in the bond markets since at least 2008 when I became a member. They also have called for more pain in Real Estate (not). I have lost $ on their recommendations, and all subscribers should be very cautious with their reco’s
I have been hanging with short term t-bills for some time waiting for this to happen. Being retired the .001% interest rates have made life unpredictable. However, I hope that hyper-inflation will never happen in my lifetime. I saw it happen in Zimbabwe in recent years and, thru a collection of German stamps from the past could sense the wild gyrations of the German economy in the late 1920 and 1930′s. Keep us informed!
The Federal Reserve has created more bubbles than they have ever solved. The constant manipulation of the money supply and interest rates creates an atmosphere of uncertainty and does tremendous harm to our entire monetary system. The Fed has destroyed the value of our dollar by printing fiat money. We enjoyed a sound dollar and a stable monetary system until 1913, before Congress delegated that responsibility to a bunch of wealthy bankers and wall street crooks.
I can’t see how the 12 unelected idiots at the Fed would allow interest rates to rise because that would cause a huge rise in our debt payments. I therefore believe the Fed will continue printing money indefinitely. They have no other choice.
I have Ameriprise Financial annuities which have bonds in them.. I moved them to highest risk (aggressive) as they are guaranteed and to dump bonds. The one from which I take money they said had to stay at medium risk. I keep thinking Ameriprise should be awake and make changes inside the annuities but there’s nothing more I can do at this point. If you react to the word annunity I will assume instead of answering you are railing against my previous decisions. I looked up Ameriprise’s credit rating and I found it very confusing as if credit ratings weren’t already confusing. What do I do now? I’m lowering my bills to free up cash but the process isn’t done yet. I don’t know what else to do.
It is well known historically that the bond market crashes during the K-winter. Dr. Weiss has been warning about this for a long time … see his excellent article … “The Most Dangerous Bubble of All” (17 Feb 2011).
The up leg that the S&P500 has been in since 16 November 2012 is the last upleg we well see … even if it results in a new high. Once it peaks the next long term bear market leg will begin … and its going to take everybody with it. Mr. Edelson (7 Jan 2013 article … view of the DOW) … good luck.
If Weiss research is right about the bond market implosion happening now … then that means that both the bond and stock markets are on the precipece and a double decker gloom is about to begin (it will all happen within approximately 1 to 3 months … I’m leaning toward 1). Hunker down.
mY 401 WILL ONLY ALLOW THE PURCHAS OF MUTUAL FUNDS. wHAT IS A GOOD MUTAL BEAR FUND FOR TRESUARIES
Does this mean that we should take protection (insurance) on the bond market heading South?
Keep up the good work. Your research saves me a lot of time.
Regards Tom
Looking forward to reading your info.
What about government bonds?
How do I move money overseas if most of my money is in an IRA? Are there investments I can do and will I have to pay to withdraw money to than invest outside US?
is this the time to buy gold and silver?
In Australia and have followed Weiss for a long time. Any thoughts on when gold will decouple from this current crises and start its 5k ounce bubble run?
Can I sell 30Y bonds without owning bonds?
Should I sell March 2014 futures instead?
The only thing we can be sure of is that government will continue to do everything possible to continue what ever spending it can promote. As long as world investors will allow US spending it will continue. It’s obvious government is not worried about debt levels i.e. world governments.
Calling an end to the stock market’s rise seems absurd in hindsight. But, we all know this game of chicken is being played and we all know the consequences. Considering government’s record both recently and in all past history it is getting less and less wise to bet along with them as they continue to raise the stakes.