Thursday, January 29, 2009

Bonds Erratic… Losing Control?

TIPS 10-Year Breakeven Rate Climbs to 1% on Inflation Concern

By Dakin Campbell

Jan. 29 (Bloomberg) -- The difference between 10-year Treasury Inflation Protected Securities and nominal Treasuries rose to one percent for the first time in more than three months as traders brace for government-induced inflation.

Inflation concern is increasing as policy makers look to boost government spending and expand Federal Reserve lending to counter the worst economic slowdown in 25 years. President Barack Obama’s $819 billion stimulus package, which does not include an estimated $1 trillion bank-rescue plan, may soon be passed by Congress. Thirty-year bond yields have risen 82 basis points this month to 3.5 percent as investors shy away from government securities most sensitive to inflation.

“There’s no question that there has been a change in investor sentiment,” said Nils Overdahl, a bond-fund manager at New Century in Bethesda, Maryland, which oversees $500 million. “The amount of money being printed and the amount of debt being monetized right now is something you have to pay attention to.”

The difference between 10-year TIPS and Treasury notes, the so-called breakeven rate, increased 11 basis points, or 0.11 percentage point, to 1 percent at 1:26 p.m. in New York. The yield gap, a reflection of traders’ expectations for inflation over the life of the security, was as low as minus 0.08 percent Nov. 20. It was last at 1 percent on Nov. 10.
They may have “tools,” but they are standing naked in a TSUNAMI while trying to use them.

Guys, this is bad, as in real bad. TLT is bent on going down the back side of that parabolic curve and is collapsing in a classic parabolic collapse:

Here’s the TNX (10 year)… launching above the 50 day average and running into the upper Bollinger band. Up nearly 5% today!

And look at the IRX (3 month)… up above the upper Bollinger and rising.

While rates are still low, this is a powerful thrust, one that has to have the Fed very nervous. As the entire curve shifts higher, interest rates go up, exactly what is not needed and exactly what happened during the Great Depression. Ignore the charts if you want, I think TLT is fulfilling that 3 peaks and a domed house pattern.

Here’s Mike Larson’s latest take:
Hate to say I told you so, but ...

The Treasury bond market continues to collapse under its own weight. The long bond futures are down ANOTHER 28/32 as I write, extending recent losses to around 15 points in price. In fact, this month is shaping up to be the worst month for the Treasury market going all the way back to April 2004, according to Bloomberg.

Not only did the Fed fail to live up to expectations that it would immediately (or very shortly) start buying Treasuries, but demand for the latest flood of 5-year notes also came in weak. The Treasury sold $30 billion of 5s today at a yield of 1.82%, above pre-auction talk of 1.8%. The bid-to-cover ratio also came in weak at 1.98 (the lowest since September and before that, May). Indirect bidding was the only bright spot, with 34.9% of the notes sold going to that group (which includes foreign buyers).
The real ugly? I’ll give Denninger credit for pointing out this pattern again this morning… that’s a pennant on the weekly SPX chart. The top of that staff is at 1,313, the bottom at 714… that’s 599 points. If it breaks downwards, the expected direction for such a formation, you would be looking at a target of… get this… less than 300!

Ah, Well... we can always HOPE that it breaks the wrong way, but bonds and stocks selling off in concert is a clue that all is not well. Hello, is there anybody out there?

Pink Floyd - Is There Anybody Out There?