From Bill Cara's blog... He's right
There was a considerable strengthening this week in the bond market.
The 30-year Treasury Bond Index (TYX), which is a reflection of yields showed long bond yields down 3.12 pct on the week. The 10-year (TNX) were down 4.85 pct, and the 5-year (FVX) were down 5.73 pct on the week for the Treasury Notes. But the T-Bill yield (IRX) was up 0.44 pct.
What does this mean? Well first look at the Yahoo Finance yield tables.
According to the data at Yahoo Finance, the 30-day to 30-year yield spread on the U.S. Treasuries moved down from 216 basis points three weeks ago to 208 bp two weeks ago, then up to 213 bp a week ago. But last week, bond investors read the economic data out of the U.S. and said ”Buy bonds; problems ahead.”.
From the U.S. Fixed Income (Bonds) Yield Table at Yahoo Finance, the 30-year T-Bond is now yielding 4.59 percent, down from 4.84 pct three weeks ago. That is a major drop in yields, which means a major increase in the appetite for long bonds. And, as noted, the T-Notes were in even greater demand.
This means that a collision is coming as the Fed tightens by increasing the overnight bank lending rate, which it does by buying bank reserves, leaving less for commercial banks to loan out to its clients. As the Fed knows, many of those clients are real estate speculators and commodity price speculators.
If the economy really does slow down to the pace expected by the bond investors, then pretty soon the Fed tightening will cause a flat to inverted yield curve, which signals recession is headed our way.
Do I think that will happen? Not bloody likely. Whatever you think of the economy, this week I showed you it is running on from two to four cylinders, depending on which country road you travel. Kudlow even got it right; this ‘ol engine ain’t going to die. Don’t bet against America, warts and all.
In the heat of the moment, the commercial lenders will simply have no money to lend out to certain clients at such attractive rates as they’ve been giving. So, why fight the Fed? These banks know full well what the Fed is going to do here. It’s going to continue to tighten until price speculation in real estate and commodity prices is stopped, so the commercial banks will soon start to lend a hand, and divert their available funds into loans to sustainable wealth creators.
JJ Cramer is screaming of course, but he has this problem see? He wants desperately to satisfy his CNBC audience, who he knows are mostly long stocks in an extreme bear phase, so he’s got to give them hope. He says the Fed will blink. But he loves the flaming red-hot price of his East Side Condo (or wherever it is on Millionaire Row he lives), so he loves the speculative demand that is driving prices higher.
But the Fed won’t blink.
Sorry JJC, the price of your home is going to fall before this bear cycle is over.
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