The Bond Market Trembles

‘I don’t have time to write you a short letter, so I wrote a long one instead,’ Mark Twain once quipped. It’s a lot easier to ramble on than to say something powerful in a direct way. Today’s Markets and Money will be short and to the point, mainly because we have nothing helpful to say about the wider market.

We’ll stick with this: watch the bond market.

Yes. Yes. Being told to watch the bond market is like being told to eat better, lose weight, and exercise more. Everyone knows it’s a good idea. It’s just so boring. Why do it then?

Rising bond yields (which means falling bond prices) will tell you that investors are giving up hope. Giving up hope that Europe will finally sort itself out. Giving up hope that the Fed knows what it’s doing. And giving up hope that Australia has competent economic management.

The one chart we keep our eyes on in is the one below. It’s in index tracking prices on 10-year US Treasury notes. Ten-year notes get bought because they’re ‘safe’ and ‘liquid’. It’s possible falling bond prices indicate investors are comfortable taking risks (buying stocks). But falling bond prices will indicate the ‘authorities’ have lost control of their ability to manipulate the price of credit.

10 year US Treasury note price index

If you thought the fight over the ‘fiscal cliff’ was a doozy, wait until you watch the fight over the ‘debt ceiling.’ It’s going to a no-holds-barred fight over spending, taxes, and the relationship between man, economy, and State (to channel Rothbard). It also has the potential to scare the geewillikers out of investors.

Apologies for not following up on the issue of stock hoaxes and the rule of law. We promise to get to it tomorrow. For now, we’ll zip it and turn it over to Doug French, who has some points to make about India and gold.

Dan Denning,
for Markets and Money

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