Forex Investment and Currency Trading

U.S. T-Bond

• This looks like a classic blow-out top to the bull market in place since 1981 (27 years)
• The surge into December last year in an already very mature market followed by one of the largest down months on record bears all the hallmarks of an explosive blow out top.
• A decisive move below the 123 area would look to support that concern and suggest at least a return to the channel base presently close to 109. Such a development would suggest a yield north of 5% again.
• How could this happen in a Quantitative-easing scenario???
  • If we are de-leveraging the excess of the last 30 years then intuitively a cornerstone of that excess has been the cheap and easily available credit available to consumers, companies and the Government alike. In a World where the global economy is deteriorating sharply and in the U.S. in particular we are going to see Governments trying to fill the gaps left in the deteriorating economies. To that end it seems inevitable that deficits are going to rise strongly and in the U.S. case in particular the “hole to fill” left by the U.S. consumer could be enormous. Do we really believe that a program to buy USD300 bio of Govt. bonds is going to overshadow the potentially huge supply coming down the pipeline? Do we really believe in this global dynamic that the U.S. is just going to be able to fund larger and larger amounts at lower and lower yields???? That thought process just defies logic.
  • In addition the reality at the moment is that the issue lies less with the absolute levels of Government yields and more with the spreads between them and other instruments. As a consequence there is no guarantee that even a successful push lower in Govt. yields will be fully reflected in other instruments (Mortgages in particular)
  • Bottom line we know that the authorities would not like to seen higher yields but then we are sure they did not want a collapse in housing, credit, equities and economic activity. If the last 2 to 3 years have shown anything it is that just because they do not want it that does not mean it will not happen. Given the amount of borrowing likely to be needed to support this dynamic it is skeptical that the control is in the hands of the borrower (U.S. Government) and really fear that higher long-term yields (i.e. Government yields here) are a real danger in the months if not years ahead on the back of this dynamic.