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Bonds, U.S. Bonds


There is another Bond, one in which theoretically 007 might well have met his match.

"What does it matter to ya
when you got a job to do
you gotta do it well
you gotta give the other fellow hell..."
(Live and Let Die, Paul McCartney & WINGS)

Remember Q, the character in the James Bond films who devised the gadgets and instruments that allowed Bond to persevere over the villains?

There is another Bond, one in which theoretically 007 might well have met his match.

The full faith and credit behind this other particular bond is none other than Dr. Yes, the kingpin of global credit creation – the U.S.

And the instruments created by His Majesty's secret service is no match for the instruments of mass derivatives created in the canyons of financial capitols.

U.S. Treasury securities turned down sharply beginning in May, sending interest rates abruptly higher.

Why? One reason may be China. Up to now China has been a huge buyer of U.S. securities. The Chinese don't have to be net sellers of bonds to send rates higher – reduced participation and/or a perception of reduced future purchases can affect interest rates negatively.

Is it just happenstance that in May, when Chinese officials met in Washington with Henry Paulson and Congress to discuss currency and trade issues, U.S. interest rates shot higher? Has there been an embargo as to just how bad the meetings went?

Is the $3 bln Blackstone (BX) investment by China just a Cantonese canard? A ploy to skin the fat off the message sent to Washington? Are recent incidents concerning the safety of Chinese food imports into the U.S. a retaliatory punch?

The point is that low rates, cheap capital, and 13% money supply growth have paved the path for private equity and hedge funds to drive over stocks.

Worldwide economic expansion has occurred as central banks around the world have been running to keep up with U.S. printing presses in order to maintain a competitive currency. This worldwide expansion has further invigorated global stock markets, pouring gasoline on a fire of rationalization in a virtuous circle of credit fire, hedgie heat, and psychological winds.

However, on June 7, ten-year U.S. Notes broke over 5% in their greatest single day rise in over two years.

As a reminder, on that day the DJIA declined 200 points and lost over 400 points, just shy of 3%, in three days at that time.

Since then bonds staged a relief rally and stocks recovered accordingly. But last week interest rates started up sharply again.

The terrifying thing is that while the U.S. Dollar initially rose as 10-year yields rallied, last week as 10-year yields moved up sharply again, the dollar sold off, convincingly flirting with a break of multi-year lows.

A) The Dollar rallied as yields spiked. However, the current resumption of the rise in yields has left the dollar in the dust.

The jaws between a declining bond market and a rising equity market are wide open. Such was the case 20 years ago when the market also climaxed in a 90 day blow-off into the summer. Then as now there was another sharp tooth to snare investors – the U.S. Dollar.

This time, the jaws have two additional fangs: oil over $70 and a phantom of protectionism.

As seven is the number of change, it will be interesting to see the behavior of the markets after the seventh day of the seventh month of a seventh year, seven years from the 2000 high and seven weeks from this years closing high.

With the major indices scratching their way back toward old highs on light volume and meager breadth, yields climbing, and volatility contracting with momentum stocks going vertical, it will be interesting to observe the behavior of the markets after the holiday-shortened week and prior to earnings season.

Oh, by the way: one interesting thing did occur over the weekend. The uptick rule for shorting was eliminated. The truly remarkable thing is that although this has everything to do with the underlying nature of how stocks are traded, it was barely reported. Live and let die.
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