QE party is ending, Phoenix Capital Research
Aug 20, 2013 14:40:46 GMT -6
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Post by jeffolie on Aug 20, 2013 14:40:46 GMT -6
In this issue
Japan's bond market is breaking.
Why 99% of investors are not ready for a bond market sell-off.
The one line Bernanke is praying doesn't break.
More!
--------------------------------------------------------------------------------
August 20, 2013
The One Line Bernanke is Praying Doesn't Break
The QE party is ending. And the following hangover is going to be brutal.
Since 2007 the Central Bankers of the world have operated under the belief that they can hold the financial system together by engaging in round after round of Quantitative Easing (QE) without losing control of the bond markets/ interest rates.
They believed this because:
1) We haven’t had a bear market in bonds in 30+ years
2) They believe that they (Central Banks) will never lose credibility with the markets.
This entire theory crashed into the wall in April 2013 when the Bank of Japan announced its “shock and awe” QE program.
The yield on the ten-year Japanese Government bond has since violated its trendline and is now retesting former resistance. This is a classic breakout that typically precedes sharp moves higher. In the case of Japanese Government bonds, this would mean the bonds losing value.
gainspainscapital.com/wp-content/uploads/2013/08/japanese-bonds.png?inf_contact_key=398e10928d84681abfded62856a82fb3b6c1c1d9a7bc565f1019110521970738
Why does this matter?
This matters because bond markets have a nasty tendency of spinning out of control very quickly once things begin to unravel. A great example of this is Italy, which was considered a rock solid pillar of the EU for the better part of the last 15 years… and then, it lost all credibility in a matter of weeks and began to collapse.
gainspainscapital.com/wp-content/uploads/2013/08/italy-ten-year.png?inf_contact_key=9fa890d8620be6fcd44cab5c469c707966f9727bf33930c605a72a4be770d5ef
As you can see, Italy’s ten-year bond yield broke its trendline in the autumn of 2011 when the EU crisis first began to spread outside of Greece. It hovered around 5% for a few months and then skyrocketed above 6%. Later it spiked again above 7%.
Both of these spikes occurred in just a few weeks’ time. What was thought to be “rock solid” for over a decade became bankrupt in a matter of months.
On that note, Ben Bernanke is praying to the Market Gods that the ten-year Treasury doesn’t take out the line below:
gainspainscapital.com/wp-content/uploads/2013/08/US-ten-eyar.png?inf_contact_key=6ce01cd1fa60f5a80fe3a25730cf89c4279137c64cd284e917afdae8ce26c1b2
“So what?” many will think. What’s one trendline for bonds?
As the long-term chart shows. This isn’t just any trendline. This is THE trendline. Take it out and the 10 year will likely be yielding 5-6% in no time which by the way is where it was for most of the ‘90s and very early ‘00s.
gainspainscapital.com/wp-content/uploads/2013/08/sc-4.png?inf_contact_key=9644aac9056ccef07226d170e42a44e8f6dc16511f9b13601be3f11df89032d9
The only difference is that a drop like this would literally render the Fed bankrupt. The Fed currently owns 30% of all the ten year Treasuries in existence. If yields were to return to 5-6% on the ten year Treasury then the Fed would have literally lost several hundred billion Dollars on its Treasury holdings.
Sure, the Fed could print money to deal with this. But if Treasuries begin to collapse while the Fed is already buying them… and it can only buy more by money printing, then it’s GAME SET MATCH for Bernanke’s QE, the Fed, and the US economy.
Phoenix Capital Research
www.zerohedge.com/contributed/2013-08-20/line-bernanke-praying-wont-break
Japan's bond market is breaking.
Why 99% of investors are not ready for a bond market sell-off.
The one line Bernanke is praying doesn't break.
More!
--------------------------------------------------------------------------------
August 20, 2013
The One Line Bernanke is Praying Doesn't Break
The QE party is ending. And the following hangover is going to be brutal.
Since 2007 the Central Bankers of the world have operated under the belief that they can hold the financial system together by engaging in round after round of Quantitative Easing (QE) without losing control of the bond markets/ interest rates.
They believed this because:
1) We haven’t had a bear market in bonds in 30+ years
2) They believe that they (Central Banks) will never lose credibility with the markets.
This entire theory crashed into the wall in April 2013 when the Bank of Japan announced its “shock and awe” QE program.
The yield on the ten-year Japanese Government bond has since violated its trendline and is now retesting former resistance. This is a classic breakout that typically precedes sharp moves higher. In the case of Japanese Government bonds, this would mean the bonds losing value.
gainspainscapital.com/wp-content/uploads/2013/08/japanese-bonds.png?inf_contact_key=398e10928d84681abfded62856a82fb3b6c1c1d9a7bc565f1019110521970738
Why does this matter?
This matters because bond markets have a nasty tendency of spinning out of control very quickly once things begin to unravel. A great example of this is Italy, which was considered a rock solid pillar of the EU for the better part of the last 15 years… and then, it lost all credibility in a matter of weeks and began to collapse.
gainspainscapital.com/wp-content/uploads/2013/08/italy-ten-year.png?inf_contact_key=9fa890d8620be6fcd44cab5c469c707966f9727bf33930c605a72a4be770d5ef
As you can see, Italy’s ten-year bond yield broke its trendline in the autumn of 2011 when the EU crisis first began to spread outside of Greece. It hovered around 5% for a few months and then skyrocketed above 6%. Later it spiked again above 7%.
Both of these spikes occurred in just a few weeks’ time. What was thought to be “rock solid” for over a decade became bankrupt in a matter of months.
On that note, Ben Bernanke is praying to the Market Gods that the ten-year Treasury doesn’t take out the line below:
gainspainscapital.com/wp-content/uploads/2013/08/US-ten-eyar.png?inf_contact_key=6ce01cd1fa60f5a80fe3a25730cf89c4279137c64cd284e917afdae8ce26c1b2
“So what?” many will think. What’s one trendline for bonds?
As the long-term chart shows. This isn’t just any trendline. This is THE trendline. Take it out and the 10 year will likely be yielding 5-6% in no time which by the way is where it was for most of the ‘90s and very early ‘00s.
gainspainscapital.com/wp-content/uploads/2013/08/sc-4.png?inf_contact_key=9644aac9056ccef07226d170e42a44e8f6dc16511f9b13601be3f11df89032d9
The only difference is that a drop like this would literally render the Fed bankrupt. The Fed currently owns 30% of all the ten year Treasuries in existence. If yields were to return to 5-6% on the ten year Treasury then the Fed would have literally lost several hundred billion Dollars on its Treasury holdings.
Sure, the Fed could print money to deal with this. But if Treasuries begin to collapse while the Fed is already buying them… and it can only buy more by money printing, then it’s GAME SET MATCH for Bernanke’s QE, the Fed, and the US economy.
Phoenix Capital Research
www.zerohedge.com/contributed/2013-08-20/line-bernanke-praying-wont-break