Normally a two-month slide in U.S. Treasury Bond prices would not be cause for concern amidst a massive equities rally like the one we are currently witnessing/trading/trying to make sense of. But, these are anything but normal times. The monthly close of 3.17% is noteworthy simply because of how long it has been since the yield has closed above 3%. The Fed, through Operation Twist, was purposefully holding the yield down but once the calendar clicked over to 2013 that line could no longer be defended. Too many external factors began overwhelming the Fed's ability to absorb the incoming supply. But, the Fed is relentless in its desire to keep yields at historic lows. A quick look at the monthly chart of the 30 year bond (AMEX:TLT) reveals how strong its intervention has been - especially since Operation Twist began back in 2011.
Add to Operation Twist the uncertainty in the Euro-zone and the long bond saw an enormous safe-haven bid. That extreme fear in the markets ended back in July of 2012 and has since reversed itself. Again, the monthly chart reveals this quite clearly.
As much as the Fed wants rates held down, eventually the market overwhelms even the most concerted manipulation. If you don't like the word manipulation, well, that's tough, because that is exactly what Quantitative Easing is, manipulation through non-economic buying of bonds to produce a desired result. One could - credibly I might add - make that argument about all central bank open market operations.
What's happening in the long U.S. Bond is revealed in the price action of the Euro (AMEX:FXE). As I type this the Euro is trading above $1.36. The monetary statistics from the ECB clearly show it contracting its balance sheet while the Fed's is hitting record highs. The Fed has threatened money printing for so long now that we almost don't believe it until it's too late. But, here's the latest release of the Adjusted Monetary Base.
This is the face of incipient inflation in the things that are bought and used on a daily basis. Moreover, the Fed is attempting to blunt with more QE and negative interest rates any attempt by users of the Dollar to actually save them. They want desperately to reverse this trend. The rapid rise in M2 in Q4 was a signal to the Fed that there was too much savings going on and that needed to stop. (click to enlarge)
Hence, this is the main reason why we got the QE4 announcement in early December and the expansion of the Fed's bond-buying program. Thursday's release of a massive shift in the savings rate from 3.6% to 6.5% month-to-month should have been unexpected by anyone who knows why the Fed is engaging in every more desperate tactics to stimulate money velocity.
The chart above clearly shows the effects of the various QE programs on both Gold (AMEX:GLD) and equities, exemplified by the S&P 500 (AMEX:SPY). The glue that holds all of this together is the savings rate. And the announcements of changes in the Fed's policy towards QE have been timed nearly perfectly with tops and bottoms in the savings rate.
But, this time with bond yields rising while the Fed is still buying is signaling something has changed. Yes, M2 and MZM have sharply declined since the beginning of the year, which means that those savings is being deployed, whether that was in response to anything the Fed has done or a number of other potential factors is not clear. The fiscal cliff resolution took a lot of uncertainty out of the markets. This makes the GDP contraction much more understandable.
But the Fed's purchasing program is not enough to keep bond prices at their lowest anymore. It owns most of the supply of 30 year treasuries. What is clear right now is that the savings are being put to use which is fueling the rallies in equities. The bond markets are responding to the changes in the balance sheets of the Fed and the ECB and are asking for higher returns. Money is flowing out of the long dated bonds and into short-dated TIPS (AMEX:TIP) in recent days. The 5/30 TIPS spread blew out to 1.98% to end January. The fact that gold has not responded to all of this in a big way speaks to it being undervalued in the current environment while movement back into European bonds and out of U.S. Treasuries is the likely culprit along with some help by interested parties in Washington D.C. and New York.
The big takeaway from this is that I would be watching the peak at 3.22% on the 30 year Treasury bond. If that is taken out on a weekly basis during February that creates a very high probability that this rout in U.S. treasuries will continue through March and the beginning of the long-expected rout of the U.S. long bond will finally occur because of a loss of confidence in the Dollar as a store of wealth. When the lack of confidence takes hold of even a small percentage of investors that will be enough to send Gold higher prices along with bonds to much higher yields. The Fed is inviting this scenario but it doesn't want Gold to betray it because gold is the canary in the monetary system's coal mine.
Additional disclosure: I own Gold, Silver and a few dozen Goats