Now the Fat Lady is REALLY Singing for the Bond Market
The most significant market development so far in 2018 has not been the wild gyrations of Bitcoin, the nonstop rally in stocks (SPY), or the rebound of gold (GLD).
It has been the utter collapse of the bond market (TLT), which is now probing to one year lows.
I love it when my short, medium, and long-term calls play out according to script. I absolutely hate it when they happen so fast that I and my readers are unable to get in at decent prices.
That is what has happened with my short call for the (TLT), which has been performing a near perfect swan dive since the end of last year.
Those of you who ran the yearend risk and sold short early, well done! If you bought the ProShares Ultra Short 20+ Year Treasury Bond ETF (TBT), as I pleaded you to do you have made 10% in two weeks, with minimal risk. Those who bought the deep out-of-the-money LEAPS are up more like 100%.
The yield on the ten-year Treasury bond has soared from 2.04% in September to an intraday high of 2.60% today. It melted up the last 20 basis points only in the past week.
Lucky borrowers who demanded rate locks in real estate financings at the end of 2017 are now thanking their lucky stars. We may be saying goodbye to the 3% handle on 5/1 ARMS for the rest of our lives.
The technical damage has been near fatal. The writing is on the wall. A 3.0% yield for the ten year is now on the menu for 2018, if not 3.50%. 2019 is looking like 4.0%
This is crucially important for financial markets, as interest rates are the well spring from which all other market trends arise.
It is important to note that the yield spike to 2.60% brought us the first dip in stock markets in this year. In fact, stocks initially rise when rates are crawling off the bottom, as they are a sign of a robust economy and economic health.
And while tax cuts are terrible for bonds, they are unbelievably great for stocks. To use Warren Buffet’s characterization, chopping the corporate tax rate from 35% to 21% means your take home has risen from 65% to 79%, an eye-popping increase of 21.54%.
That means the value of US stocks jumped by 21.54% overnight when the calendar turned the page from December to January. No wonder the market has gone up every day!
But longer term, and I’m thinking 18 months, rising interest rates trigger recessions and bear markets. So, make hay while the sun shines, and strike while the iron is hot.
You can put the blame in this mini-crash squarely on the new tax bill. After all, there is barely a scintilla of inflation in the economy anywhere, except in asset prices, which is normally what crushes bond prices.
Wiser thinkers are peeved that the promised bleeding of federal tax revenues is causing the annual budget deficit to balloon from a low of a $450 billion annual rate last year to $1 trillion this year.
As rates rise, so does the debt service costs of the world’s largest borrower, the US government. The burden will soar in a hockey stick like manner, currently at 4% of the total budget.
What is of far greater concern is what the tax bill does to the National Debt, taking it from $20.5 trillion to $30-$40 trillion over the next ten years. If we get the higher figure, then we are looking not at another recession, but a real 1930’s style depression.
Better teach your kids to drive for UBER early, as they are the ones who are going to have to pay off this gargantuan debt.
So what the heck are you supposed to do now? Keep selling those bond rallies and buying the stock dips, even the little ones. It will be the closest thing to a rich uncle you will ever have, if you don’t already have one.
Make your year now, because the longer you put it off, the harder it will get.
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