September 28, 2018

The Bond Market is Flashing a "Late 2007" Signal... Remember What Came Next?

The Fed is starting to get into serious trouble.

The US bond market is moving in the WRONG way fast. And while these moves don’t indicate that a crisis will hit today… if the Fed doesn’t get this situation under control soon things could get UGLY.

The yield on the 10-Year Treasury bond, the single most important bond in the world, has broken a multi-decade downtrend. If this does not reverse soon it means the 30+ year bull market in bonds is OVER.

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Even worse, a similar pattern is emerging in the 30-Year US Treasury.

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The Fed is Facing Two Bubbles... And It Can Only Save One

Yesterday, the Federal Reserve stated it would no longer be “accommodative” with its monetary policy.

On that same day Fed chair Jerome Powell stated that stock market valuations were in the “upper reaches of historic ranges” i.e. bubbly.

And most importantly, the Fed stated it would likely hike rates again in 2018… with another three rate hikes in 2019. If each rate hike were for 0.25%, the Fed is targeting an interest rate of 3.25% before it’s done.

Why is the Fed acting so aggressively? Remember, both the Bank of Japan and the European Central Bank are running NEGATIVE interest rates while also engaging in Quantitative Easing policies.

Meanwhile, the Fed is planning a total of 12 rate hikes before it’s finished… while engaging in a Quantitative Tightening program that would drain an amount equal to Sweden’s GDP from its balance sheet every single year.

Why is this?

Because the Fed is trying to get the bond market under control.

In chart form, the Fed's primary concern is this…

The yield on the 10-Year Treasury bond, the single most important bond in the world, has broken a multi-decade downtrend. If this does not reverse soon it means the 30+ year bull market in bonds is OVER.

That is a MUCH bigger deal for the Fed than this...

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Yes, stocks get the attention because they are more volatile, but it is the BOND BUBBLE, AKA the Everything Bubble, that is Fed’s primary concern.

If stocks drop, investors lose money… if bonds drops, entire countries go broke.

Which is why the Fed is engaging in its most aggressive rate hike cycle in history. It NEEDS to get bond yields back below their long-term trendline one way or another. And if collapsing stocks to force capital into bonds is the way it has to be… so be it.

Again, this is a MASSIVE deal. And while 99% of investors are focusing on stocks... it is BONDS that are flashing a major warning.

The whole situation is getting eerily similar to late 2007. And now, like then, the vast majority of investors have no clue how to invest during the coming crisis . Which is why smart investors who put capital to work here stand to make LITERAL fortunes.

Best Regards.

Deo Talaverano.

Chief Market Strategist DHF.

George Town. Cayman Islands.