Bond market capitulation may be further away than I thought. Today, the Bond market sold off big time today, retesting the lows of last week, both on the 10year and the 30year. All of the pundits are saying that investors are thinking that the recession is over, and that they are getting their money invested into stocks. I have a different perspective: I believe that Bond holders are acknowledging the fact that the Federal reserve is assisting the U.S. Treasury by monetizing their debt, or basically making the currency and the debt worthless via the printing presses. Therefore, stocks and commodities are going up by default, because there is not other better option. This rally today was widely led by commodity based companies. Oil was higher as well as soft commodities. Precious metals were weak today, which was surprising to me.
If the Bond market continues its slide, there could be skyrocketing inflation and interest rates ahead of us. It would be prudent for any investor to have some hard assets in this environment. The level to watch now is the 4% mark on the 10 year note. If we break that level than we are in for some major trouble.
Banks did not participate in todays rally as much as you would expect, that to me suggests that this rally is getting weaker. You have to have the banks, as well as the consumer discetionary stocks participating. The XLF (financials etf) and XLY(consumer discretionary etf) failed to take out the previous highs from a couple of weeks ago, so I see this as a sign that we are near a top for the short term. But if Bond investors continue to flee those "safer"investments, there is no telling what might happen.
Cash21
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