Treasury market asserting itself

Bond investors still have the power to stifle the Fed, although they may do it much more quietly than had been expected.

By Bill_Fleckenstein Jun 21, 2013 5:04PM

Currencies Source: © John Woodworth, Photodisc, Getty ImagesThis week brought another installment of "As the QE-driven world turns," starring Federal Reserve Chairman Ben Bernanke, who held a news conference June 19 following the Federal Open Market Committee’s latest policy meeting.


First of all, regarding the presser, let me be clear that there was nothing in what Bernanke said that could have led anyone to think that the Fed is inclined to take actions that could remotely be considered tightening.


Bernanke went out of his way to say that even when Fed officials got around to reducing the amount of Treasurys they were purchasing, they would, to use his metaphor, still be stepping on the accelerator, just at a reduced rate.


He also took great pains to point out that there would be some lag between whenever the Fed reduces its bond buying and when interest rates might rise, or that the Fed's balance sheet might actually shrink. Further, he noted that everything was data-dependent.


If it looks like a dove and talks like a dove . . . 

I realize that, in the aftermath, people have been trying to argue that Bernanke used more hawkish language on June 19 and that must mean the economy will improve, but neither is the case. 

He did indicate that a cessation of money printing, "…would basically say that we've had a relatively decent outcome in terms of sustained improvement in growth and unemployment." But he also noted that none of their economic targets were "triggers" that would lead to automatic action; rather, they were "thresholds," meaning they would be dissected and discussed. Finally, he stated, "If things are worse we will do more. If they are better we will do less."

Bottom line: The Fed chief couldn't have been much more dovish, unless he had said, "Look, we will never stop QE." Short of that, what he said was not remarkable at all.


On the subjective side, given that the economic data have been decent only when graded on the curve of the last few years, it is hard to imagine how anyone could think it will get strong enough for the Fed to taper, as Bernanke envisions, let alone act more aggressively.


The reason I make such a strong point about what Bernanke had to say is because of the response of the bond market. As regular readers know, I have been of the opinion that the Bank of Japan has overdone it with its bond-buying-driven attempts at quantitative easing (aka money printing) and we are in the early stages of seeing Japan's bond market take the printing press away from the central bankers.


They can't talk their way out of this one 

Though there has been a large backup in U.S. rates recently, I had thought that might have been a consequence of misguided fears over tough "taper talk." However, seeing the bond market roughed up as badly as it was this week after Bernanke was as friendly as he could be makes me consider the possibility that America, too, might be in the very early stages of seeing the bond market take away the printing press. If so, the ramifications are immense.


Since the Fed's fourth round of QE commenced in December, 10-year Treasury rates have risen about 80 basis points, from 1.6% to 2.4%. Rates on 30-year Treasurys have not risen as much, having been driven only from approximately 2.9% to 3.5%. But the point is that rates have risen very aggressively here and in Japan despite massive purchases on the part of our respective central banks.


In the past, when I have discussed the possibility of a funding crisis or a bear market in bonds, I would always be asked how bonds could decline given the aggressiveness of central bank purchases. I would always try to explain that once it changes its mind, no one is bigger than the market, as we have seen with U.S. and Japanese bonds declining aggressively in the face of mammoth central bank bond buying. 


What I, and like-minded others, may have missed is that the bond market here in America could already be starting to react to what has transpired so far, as well as to what is expected to occur next on the part of the central banks. After all, it is no secret that real inflation is higher than the coupon rate. And if you are no longer worried about deflation, why would you accept negative real rates on any fixed-income investment?


QE exit signs are not up to code 

A point I have made many times is that the end of the fear of a deflationary collapse in Europe would be the end of the bond market, and that could, in fact, have occurred.


In a QE-driven world, many of us have become used to the predictability of markets doing what central banks want and have operated under the assumption that exit signs would be in giant neon lights.


If, in fact, bond markets are quietly revolting against the nauseating central planning by incompetent economists with Ph.D.s. That is going to be very big news, and it will mean much weaker equity and bond prices.


Of course, at some point all of that weakness feeding back into the economy brings up the subject of additional QE, but if the bond market has changed its tune, that will be even more problematic.


I don't want to get too far ahead of myself, as we are talking about ephemeral macro crosscurrents, but I wanted to raise the possibility that maybe, just maybe, the bond market is asserting itself and life may get trickier than folks expect in the not-too-distant future.

Bird watching 

Lastly, I want to touch on two other points. The first is the reaction by the stock market, which has caused all headlines to be written in a way that suggests the Fed is going to be hawkish and is a perfect example of how the stock market creates its own spin.


Stocks were bid up on the massive QE by the BOJ and Fed, which caused people to imagine that the economy would soon start accelerating "just enough" (a.k.a., Goldilocks). When stocks have been boosted so high on easy money, hot air and leverage they are vulnerable and can fall fast if psychology changes (or the bond market tanks), which is what is happening. However, the weakness of stock markets is causing most to misinterpret the Fed's intentions.


That brings up a second, related, point. There is an (incorrect) view that the Fed "knows" the economy is getting better and therefore must prepare for its eventual "exit" from money printing. To that I say, the Fed has been wrong at every juncture in the last 10 years, never understanding what was driving the economy and overestimating growth (since 2007 or so). Bernanke is so clueless, he thought subprime was "contained" in late 2007. I rest my case.


In summary, disregard all headlines claiming that Fed intentions have caused stocks to drop. Stocks are tanking because bond markets have been crushed, not because of what the Fed supposedly has planned. Bonds are weak because central banks have lost control.


Eventually, folks will realize that the Fed is not only clueless regarding the economy (they haven't fixed anything), but also trapped. That means it and other central banks should have zero credibility versus the huge amount they have had up to this point. That mindset should lead people to worry about stagflation instead of dreaming about Goldilocks, but more events have to play out before we get to that point.

Jun 21, 2013 11:44PM
How about Ben Stops SPENDING our GRANDCHILDREN'S Futures in lieu of Wall Street's PROFITS?   
Jun 21, 2013 7:31PM

Very good, Bill... well-written informative article. Using your words... "Further, he noted that everything was data-dependent." (Referring to Bernanke).

This is the key. Data is-- BS. Anyone can selectively create what they want out of data, as two Harvard Professors showed us. Since 100% of US business platforms can't conduct business without regular infusions of QE, where does that data identify that? Bernanke constantly creates the hot air confidence that he knows how to drive the car but his eyes are never open. "Eventually, folks will realize that the Fed is not only clueless regarding the economy (they haven't fixed anything), but also trapped. That means it and other central banks should have zero credibility versus the huge amount they have had up to this point." Indeed... but the least of our worries is stagflation, the greatest mimicking a Japanese condition... generations left on the bench that cannot perform or sustain. Better to: Close the banks, end the Federal Reserve and get RID of Wall Street, which would send those Ph.D's towards the dumpsters for dinner. It will happen... and soon.

Jun 22, 2013 2:26PM
There will be no soft landing to use Fed speak. You mess with free markets to save them and you only postpone the inevitable.
Jun 22, 2013 4:53PM
Jun 21, 2013 6:59PM


I can't think about this right now, I'm so upset.  The Food Network dropped Paula Deen.



Jun 21, 2013 6:59PM
Japan continues to be a bug in search of a windshield.

The Nikkei 225 is down 20% from its peak of 15,627 to a low of 12,445 this month. Currently, it's only off 15% this month from its peak. Interest rates on Japanese Government Bonds are increasing rapidly.

Jun 22, 2013 6:13AM
IF their yapping they are lying and denying. Washington and wall street are corrupt and full of sheer GREED.They are NOT at all concerned about the American people and are as Corrupt as Mexico's  govt. As well as others. The 99% are slave workers that cannot earn enough to survive, a MEAGER lifestyle. FOR THE 50 percent that voted for Barrack Obama. HOW'S THAT WORKING For you?Do you not want or desire better?Washington sold dems out for A PACK OF of NOW or LATERS.ENJOY.
Jun 21, 2013 11:42PM
Mr. Bernanke said in a congressional testimony that the FED's purchases only add up to about 16% of the bonds available.  So the other 84%-the market is on a hair-trigger, and could demmand higher interest rates.  A real possiblity is our volitile world. 
Jun 22, 2013 5:48AM
This is going to be huge to real estate if it continues in this direction! People are just feeling comfortable with parting from their cash that they have been sitting on. Sure prices have stabilized somewhat, but there are still tons of foreclosures getting ready to hit the street. This will certainly put the kabosh on the "stimulus". It won't make it beneficial to borrowers looking to refinance, thus allowing more money to flow, and to think they just extended HARP till 2015.....they just spit into the wind??
Jun 22, 2013 9:35AM
The economy is doing what its doing,.....despite the efforts of the so called financial experts,......much less the politicians and politicos,.....
Jun 22, 2013 8:22AM

"Mr. Bernanke said in a congressional testimony that the FED's purchases only add up to about 16% of the bonds available.  So the other 84%-the market is on a hair-trigger, and could demmand higher interest rates.  A real possiblity is our volatile world."


History suggests that level of potential volatility negates credibility for those instruments. Imagine being "all in" in bonds and having the world call them JUNK and you lose it all. 

Jun 23, 2013 11:17PM

My thought is when O is gone the QE will be gone....O is to arrogant to let the country fail while he is in charge and for all those poor folks from outside the US not to have health care and cellphones and heaven forbid a check every month. 

He is possibly the beginning and the end.

Jun 21, 2013 6:46PM
Bond holders getting where is all the money running to hide? Commodities usually mover in lock step.  Bond market huge compared to equities.  Interesting position investors are caught in currently. Maybe find chase some decent yielding cyclical stocks?
Jun 21, 2013 6:47PM
Jun 24, 2013 8:47AM

It's about time we took the country back from the criminally insane inside the beltway . If it all starts with bond vigilantes,

it works for me. Maybe the people  of this country can take away a message from it...maybe not, there are minions of morons  I'm sad to report...........

Jun 22, 2013 2:39PM
The only way to get wealthy is to create value. Every time I stray from this I get stung by the money changers.
Jun 24, 2013 10:48AM
Where is Ben getting the money to buy $ billions of bonds? Who is going to pay for what the banks have made on free interest money? The give away, will it ever stop?
Jun 24, 2013 9:36AM
Monday morning... 9:35am, EST... no one is posting the market opening bell...
Jun 21, 2013 7:39PM
"Japan continues to be a bug in search of a windshield."
Fiat Money Inflation in France by Andrew Dickson White... "February 18, 1796: Machinery, plates and paper for printing assignats destroyed. First issue of new paper notes- mandats, to displace assignats at 30:1." Only fools discount things they do no research about. Japan VIGOROUSLY PRINTED and it sent Yen to all the dark holes of economic sharking pools for Central Banks. If you build a tower only to find out that every sixth brick is made out of cheese not cement, how integral is the rest of it?
Jun 22, 2013 12:51AM
There is and will be no exit pump as long and possible to far gone.
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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website,, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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