“Yesterday, the U.S. 10 year treasury bond hit our long held 1.40% target. A sea of bond bears has become an ocean of bulls. Brexit’s risk to the global economy has created an opportunity for those willing to step in and short bonds in the face of a large group of clowns rushing to the exits (abandoning their long held bearish bond positions).”
Bear Traps Report
July 6, 2016
The Fed is playing a very dangerous game. They will do anything to protect their beloved Hillary Clinton’s 2016 election hopes, but in doing so they risk financial instability. When you get too close to the edge one often gets burnt. Colossal stakes are on the line. The 10 year U.S. Treasury hit a yield of 1.63% this week, a seller’s panic has begun. As long term bond bulls we turned bearish in late June, recommended our clients SELL bonds.
Friday morning, in classic fashion our favorite “labor market” economist in Janet Yellen talked up the U.S. economy. Yellen reiterated her belief that the U.S. is nearing full employment and meeting their goals. Heading toward the 2016 election, the Fed’s cheerleading has become a double edged sword. Central bankers have been talking up the U.S. economy, but in doing so they risk waking up the beast within global equity markets.
Over the last year, every time the Fed has tried to raise rates stock market volatility has surged dramatically. There’s over $10T of debt globally tied to the U.S. dollar, commodities and emerging markets. As the Fed has kept rates near zero for eight years the easy money gravy train has exploded in size. Every second they’ve kept interest rates too low for too long, capital has oozed into places it just shouldn’t be. As the Fed tries to exit the “lower bound” the U.S. dollar surges along with systemic credit risk. As we said in January, “the Fed will NOT hike rates this year, but they will try (and fail) to get one in. ” It’s the beast in the market that will stop them once again.Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here
The global wrecking ball that is the U.S. dollar surged Friday. After over two months of public silence about her views, Yellen pointed to “continued solid performance of the labor market.”
The Fed chair also emphasized the “case for an increase in the federal funds rate has strengthened in recent months” in her speech Friday to central bankers and economists in Jackson Hole, Wyoming. Complacency had taken control over equity markets globally this summer. Friday we witnessed a rare surge in volatility, for the first time in months the VIX traded in a 23% range.
U.S. ten year Treasuries hit 1.63% today, the highest mark in 3 months.
Just as the very last bond bear turned bull, Treasuries now in the throes of the most significant sell off this year
“We’re reasonably close to what is thought of as full employment. The inflation rate this year is higher than last year’s. It’s still not up to 2 percent. But it’s been growing.”
Fed fund futures have shifted from a 13% chance of a rate CUT in (post Brexit low) to a 43% chance of a rate HIKE in September.