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The Bond King's Capitulation


With the capitulation of Gross and the actions of foreign central banks there are just too many disbelievers in bonds now for my taste.


After yesterday's bond rout I see that Bill Gross finally turns bearish on bonds.

PIMCO manager says strong economic growth worldwide should push up interest rates and yields.

Legendary bond investor Bill Gross expects strong economic growth worldwide to push up global interest rates and put a damper on the Treasury market.

Are any bond bulls left?

Gross turning bearish on bonds is an interesting event. Is there anyone now who is not a bond bear? I have to admit that the break in the long term trendline on the 30-year bond looks ominous.

I discussed this yesterday on my blog in Gold Breaks Down In Treasury Rout:

There was an absolute rout today in bonds, not just in the US but globally. Treasury trendlines are now clearly broken in several major countries. Following is a chart of the 30 year bond showing a distinct break in a trendline that dates all the way back to 1981.

Bonds were also hammered in Germany, Canada, Japan, and Spain. Does everyone believe this growth is causing the inflation story? Now? Finally? I don't buy it.

Nonetheless, this all seems to be a part of the "Good news is bad news story." On the first smattering of good news (see Good News Everywhere!) traders headed to the hills (in nearly everything).

Now that finally everyone senses that the US economy is in some sort of soft patch as opposed to the Fed being forced to cut rates because of the slaughter in housing, the stock market and bond markets were both clobbered by good news.

Subprime Fallout is Going to Get Worse

One thing's for sure and that is this rise in yields is very bad news for the housing sector. Everyone hoping for the Fed to rescue housing just had those hopes dashed. And here is a nice chart showing just what is coming up.

Now that Gross has tossed in the towel and foreign central banks everywhere want to diversify not only out of US dollars but also out of treasuries as well into higher yielding investments, it would be fitting if the US dollar puts in another sharp rally and the global growth story finally gets turned upside down.

The long term bull in bonds may be over but as of right now I am sticking with what I said yesterday: "The highs in bonds and the lows in yield have now likely been set. However that does not change my stance that once this unwind of leverage occurs, a recession sets in, and housing further collapses that the Fed will be cutting rates and yields will drop significantly. That is when I am looking for the next major rally in gold."

With the capitulation of Gross and the actions of foreign central banks there are just too many disbelievers in bonds now for my taste. A further collapse in housing and a slowdown in worldwide growth will eventually provide a test of conviction for the new bond bears as well as another huge whipsaw for the derivatives desk of Fannie Mae. Won't that be fun?

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