The bond market is taken by most observers as a clear economic indicator except, it seems, when it would indicate something investors don’t want. Long-term investors have been mystified by the lack of movement upwards in 30 year treasury bonds, which have stayed at 3 1/2% or lower, especially considering many investors were expecting 10 year bonds to spike above 3 1/2% over the next period. Cautious observers look at the longer term track record – showing bond investors have been anticipating an interest rate rise for up to five years – and draw the obvious conclusion: rates are not going up, because there is no major growth to warrant an increase.
Recent US GDP numbers back up the no-growth scenario, as analysts were surprised that the anticipated 1.8% increase expected over the current cycle turned out to be 0.1% when the numbers were released. That’s about as close to no growth as can be imagined, and it causes the bond market to throw cold water on the bullish projections otherwise made by market consultants about conditions been favorable to a bond interest rate increase. The associated economic numbers don’t look that good either. New jobs came in at 288,000 in April 2014, but that nets out at only 51,000 (which factors in the effect of jobs that were lost over the same period), and doesn’t count people dropping out of the workforce hunt altogether.
Housing numbers paint an equally stagnant picture, as a two- decade low has been reached for homeownership, with an unhealthy percentage of residential sales (43%) being the result of all cash purchases. Since only a minority of homebuyers are in a position to buy houses all cash, this means the regular housing market, based on mortgage applications, is not active at this time. The bond market is taking the lack of GDP growth, job statistics, and low mortgage activity in the housing situation all into account, in a way that the rest of the stock market is not. This accounts for the bear market signals and warning is sending to the rest of the financial community.
Despite the optimism of many economic analysts, the elephant in the room, that the bond market appears to be echoing, is the forced containment of interest rates by the banking system. This lack of cash is what is fueling the lack of GDP growth, low job numbers, limited mortgage approvals and other signs of stagnancy. The low interest rates have been purposefully kept in place to give the economy what liquidity it has. The most pessimistic trend watchers (Gerard Celente, Paul Craig Roberts, et al) believe policies of quantitative easing have so flooded the financial system with cash that releasing it to the general economy would cause a hyper-inflationary disaster. So, the banks have tried to present the mass release of monies that would tank the economy if circulated.
The government may have assisted in this forced containment of interest rates below where they should be, by encouraging the different QE money drops performed by the Federal Reserve, and even hiding were some of the cash went (according to some recent reports, many treasury bonds have been sent to Belgium). So, rather than inflation being naturally low due to the market, under this theory is just barely being kept in check by the government and the banks keeping interest rates as low as possible. What this means is that the bond market is signaling something quite the opposite that recent rallies in the stock market have indicated.
According to analysts like Gijsbert Groenewegen of 321 Gold, “if the bond market declines are really signaling what they normally are signaling, then there’s a disconnect in market pricing. The broad market concern is not the level of the 10-year, it’s the level of the S&P 500. If the 10-year is right, then the S&P 500 is wrong. The bond market would then be pricing in recession or a growth slowdown.” The current strength of additional alternate currencies or precious metals, from the yen to gold, supports the notion that the bond market’s concerned about the weakness of the dollar due to monetary inflation is probably correct, and Groenewegen’s warnings should be heeded.