I love executing one day wonders.
Since we sold short the US Treasury bond market on Monday, it has plunged a stunning 3 points. Bond yields just performed a rare 10 basis point move up to 3.18%. You usually only see that during a major “RISK OFF” geopolitical event or financial crisis.
You could see all of the key support levels failing like a hot knife for butter. The next support for the United States Treasury Bond Fund (TLT) is now at $111, or some 2.5 points down from here, pointing to a 3.25% yield for the ten-year bond.
My yearend forecast of a ten-year yield of 3.25% and a one-year target of 4.0% is alive and well.
The break marks an important departure from a stubborn two-year trading range….to the downside.
As with major breaks there is not a single a data point that broke the camel’s back. It could have been the agreement to NAFTA 2.0 on Monday or the blistering hot ISM Services print at a 21-year high on Wednesday.
Rather, it has been a steady death by a thousand cuts spread over several points that did it. It was just a matter of time before a 4.2% GDP growth rate crushed the fixed income market.
If I had to point to one single thing that triggered this debacle, it would be Amazon’s (AMZN) decision to give a 25% raise to its 250,000 US employees to $15 an hour.
If Wal-Mart (WMT), McDonald’s (MCD), or Target (TGT) have to resort to the same, you could have a serious outbreak of inflation on 2019. Imagine that, a bidding war for minimum wage workers.
ALL of those costs will be passed on to us, which is highly inflationary, and bonds absolutely HATE inflation.
Other than giving us boasting rights, the bond market move carries several important messages for us.
Money is about to start transferring from borrowers to savers in a major way. You won’t hear about seniors unable to live off of their savings anymore, a common refrain of the past decade.
Cash is now offering a serious competitor to bond and equity investments. And the next recession and bear market have just been moved closer.
The rocketing US budget deficit is starting to bear its bitter fruit as the government is starting to crowd out private sector borrowers. The budget deficit should be running at a $1 trillion annualized rate by the end of this year.
All of you celebrating your windfall tax cuts are getting a sharp reminder that the money has been entirely borrowed, some 40% from foreign bond investors we have been attacking. It will have to be paid back some time.
Of course, we all knew this was coming. It is no accident that the most capital-intensive industries in the country, also the heaviest borrowers, have seen the worst stock performance of 2018 including real estate, REITS, steel, and autos. Their profit margins have all just been seriously chopped.
So, what to do about the bond market now that we have begun the next leg in a 30-year bear market? For a start, don’t sell. Rather, wait for the next rally back up to the old support level at $116. It should revisit the old support level at least once.
When it does, SELL WITH BOTH HANDS.
