We pointed out a weekly-scale compression in US ten-year notes yields in the January 22nd edition (update below) and this has yet to break. Now there has been a similar signal from the ten-year note price that indicates a break to be imminent.
We have been preparing to be bullish of these US debt markets because there is a piece of background that makes us inclined toward the bull side, despite the usual unpredictability of compressions – we usually wait for the break and follow it.
It is easy to lose sight of an important point in all the market chatter – the continued presence of QE, in which the US authorities create money and use it to but debt instruments (mortgages, Treasury notes and Treasury bonds). No matter how wrong-headed this policy may be or how much trouble it may store up for the future, it is important to keep in mind that the government is intent on persevering with it. The actual and immediate effect is to remove many bonds, notes and mortgages from the system, which supports the price. Simply put, there is a very big, relentless buyer in the market that we ignore at our peril. Dips will be shallower, rallies will be larger and the trend is likely to remain upward so long as this is the case. This effect is magnified by the lengthy time that has passed since QE began in the US – four years and two months. In that time, a lot of the loosely-held bonds and notes (what we might call the ‘float’) have already been bought and so the constant buying that continues will tend to have an even sharper effect on the price.
This does not preclude dips in the price, as we have seen in recent days, but it should inhibit us from becoming bearish - that would mean deliberately ignoring this stern policy and the large array of weaponry that supports it. No doubt there will be a good time to short-sell these instruments as the ghastly consequences of this foolish policy become obvious to everyone (not just to Republican Americans) but we do not yet see that moment arriving.
If we are wrong, and that calamitous moment is already upon us, the signal will be a good break of these longer-term compressions shown in this present crop of charts in the direction of lower prices - the opposite way from the one we expect. There is one slight note of doubt about the direction of this imminent break from the weekly thirty-year bond series shown here, but even that is only from the yield series – the price has yet to follow it.
Of course, when the huge amount of buying that stems from QE disappears then the drop in bond prices that results will be very sharp and will probably drag other assets down too – the current correlations (both positive and inverse) by which so many assets seem ‘tied’ to one another will then abruptly end. This may be some way in the future however, so we merely mention it now.
There is due to be a turn in grain prices today, as mentioned in the 25th January edition. We did not know then whether this turn would mark a high or low point as grains have been 'ranging' lately after some rallies earlier this month. Now it looks as though the immediate prior trends into today are small uptrends (very small in most cases) which indicates that a high point is being made here today. The recent rallies appear to be fading. This is not a strong conclusion but may be worth some short-sales in the weaker members of the group if you seek risk.
More in the next few days on equities - last week's Dow turn has still not resolved and we watch intently. No change in view.