Faith in Central Banks Again in Question: Ominous Implications for Bonds
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byMike Mish Shedlock1 day[COLOR=rgba(0, 0, 0, 0.38)]-edited[/color]
All eyes are following implications of a yield curve inversion. A crucial portion of the curve signals something else.
I have been tracking, as has nearly everyone else, the constant flattening of the yield curve to the point that portions of the curve are now inverted.
Despite the near-relentless flattening on most portions of the curve. the 30-year to 10-year spread started diverging in July.
I have been watching this for weeks and the 30-year yield is the fastest to rise and slowest to drop on a relative basis. Here are a couple of recent screen shots to show what I mean.
Relative Weakness of 30-Year Bond
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This does not happen every day, but on balance it has been happening since July 9.
What's It Mean?
- This is not necessarily easy to decipher, and perhaps it is just random and means nothing at all.
- However, I suggest the long bond is signaling huge concerns over increasing deficits and mounting debt, now over $21 trillion.
Fed Rate Cuts
The bond market has also signaled the end of rate cuts. I posted charts yesterday in Rate Hike Odds Dive: Any Rate Hikes in 2019? Sucker Rally? Musical Tribute!
Yesterday I asked: Rate hikes coming? Full inversion?
With a tribute to Buddy Holly, here was my answer: Maybe Baby, but I doubt it.
Enter Kudlow
Today we see that White House economic adviser Larry Kudlow expects pause on Fed rate hikes.
Recession Coming 2019, Full Inversion Not
I think a recession in 2019 is now baked into the cake.
If so, and if the Fed does stop hiking, I doubt the 3-month to 30-year yield curve inversion that people seem to expect will occur.
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Gold vs 30-Year to 10-Year Spread
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Gold's action roughly matches the direction of the 30-year long bond to 10-year treasury note spread. Bear in mind this just started happening in 2006 following a long pause in the issuance of the 30-year bond.
Faith in Central Banks
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Central Bankers Are Bureaucrats
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Contemplating the End of the Bond Bull
In recession, I expect long-term yields to drop. How far?
I do not know. But the implications are clear.
Implications
- The long-bond is signaling a huge warning that the next move down in yields will be the last one.
- That signal is consistent with warnings over increasing deficits and mounting debt as far as the eye can see.
- It's also consistent with decreasing faith in central banks, especially the Fed.
The wizards at the central banks are likely to do nearly anything to prevent a credit wipe-out.
Add it up and a strong gold bull market seems highly likely.
Mike "Mish" Shedlock