This 27-Year Bull Market Ended Last Wednesday
By Tom Dyson
January 5, 2009
Treasury bond yields have been falling for 27 years. Eight weeks ago, they moved into the "blow off" stage.
I use the 30-year Treasury bond as the benchmark for this market. On October 27, the 30-year bond closed with a yield of 4.37%. After eight straight weeks of declines, it fell as low as 2.52%.
It's been one of the most relentless moves I've ever seen in the markets. Especially the Treasury bond market, which is normally tranquil. The 30-year Treasury bond now pays the lowest yield it's ever paid, and the recent decline is the biggest two-month fall in its history.
I believe the Treasury bubble has now popped, and it's time to start betting on a rise in Treasury bond interest rates.
First, Treasury bonds have garbage fundamentals. The Treasury is about to flood the market with supply. For example, the Treasury plans to auction more November 2018 10-year Treasury notes. It's already sold $36 billion of this bond in the last two months. Today, it will sell another $16 billion or so. That's $52 billion maturing in November 2018. In addition to increasing the size of its auctions, the Treasury has also increased the frequency of its 10-year bond auctions from eight times a year to 12 times a year.
At the exact same time, demand for Treasury bonds is about to fall off a cliff. The world's two largest customers – the Japanese and the Chinese – buy Treasury bonds with the money they earn from exporting goods to the United States. But now that the American consumer is broke, Asian exports will collapse. Less money will flow into the Treasury bond market.
Meanwhile, the Federal Reserve is inflating the money supply so fast, no one's ever seen anything like it before. Last week, for example, the Federal Reserve published its plans to buy $500 billion of mortgages issued by Fannie Mae, Freddie Mac, and Sallie Mae using freshly printed dollars. (You can read the Fed's FAQ on this scheme here.)
It's the perfect recipe for a massive rise in Treasury bond yields.
Here's the thing: Before you try to short a bubble in the financial markets, you must wait for the bubble to burst or you are liable to be wiped out in the final irrational stage. Imagine trying to short technology stocks in 1999. The Nasdaq Index doubled in the final six months of the bubble. You would have lost a fortune.
In the last two business days, yields on Treasury bonds have reversed. They surged from 2.56% to 2.81%. This is good evidence of a trend change from falling yields to rising yields. The amazing thing is, yields rose despite recent news that should have made them decline.
On Wednesday, the U.S. Labor department reported the initial jobless claims number. Economists said this statistic wasn't meaningful because it covered the Christmas week. Also, winter storms crippled the North East last week, so many people couldn't leave their homes to sign up for unemployment benefits. The day this "meaningless" news came out, bond yields jumped by 0.11% (it doesn't sound like much, but for the Treasury market, that's huge).
Then on Friday, the Institute of Supply Management reported its index of U.S. manufacturing activity had fallen to its lowest level since 1980 and its index of new manufacturing orders had fallen to its lowest reading since 1948. News like this should make bond yields fall. They rocketed higher by another 0.13% that day.
Treasury yields are ignoring news that should make them fall and rising on news that shouldn't have any impact. It tells me the path of least resistance is to higher yields... and the bubble in low Treasury bond yields finally burst on last Wednesday.
My favorite way to play a rise in Treasury bond yields is the ProShares UltraShort Lehman 20-Year ETF, which delivers twice the inverse of the long-term U.S. Treasury Index. The symbol is TBT.
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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NEW HIGHS OF NOTE LAST WEEK
Royal Gold (RGLD)... gold royalties
Validus Holdings (VR)... insurance
Castlepoint Holdings (CPHL)... insurance
Odyssey Re Holdings (ORH)... insurance
Lannett (LCI)... generic drugs
Thoratec (THOR)... medical devices
Landauer (LDR)... radiation detection
LHC Group (LHCG)... home health care
Gentiva Health Services (GTIV)... home health care
Athenahealth (ATHN)... health care services
Valeant Pharmaceuticals (VRX)... biotechnology
Emergent BioSolutions (EBS)... biotechnology
Optimer Pharmaceuticals (OPTR)... biotechnology
SXC Health Solutions (SXCI)... pharmacy benefit management
NEW LOWS OF NOTE LAST WEEK
La-Z-Boy (LZB)... furniture
51job (JOBS)... Chinese job search
Summer Infant (SUMR)... stuff for babies
Protection One (PONE)... home security
Bank of Granite (GRAN)... banking
Northrim Bancorp (NRIM)... banking
Peoples Financial (PFBX)... banking
Riverview Bancorp (RVSB)... banking
Tamalpais Bancorp (TAMB)... banking
Crescent Banking (CSNT)... banking
Carrollton Bancorp (CRRB)... banking
Stewardship Financial (SSFN)... banking
Naugatuck Valley Financial (NVSL)... banking
Princeton National Bancorp (PNBC)... banking
Southwest Georgia Financial (SGB)... banking
First West Virginia Bancorp (FWV)... banking
First Business Financial Services (FBIZ)... banking
Market Notes trade of the week: long biotechs, short banks.
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Believe it or not, I now consider gem-quality diamonds a form of money.
With the advent of the GIA certificate, one can now price a diamond fairly reasonably and accurately – as such diamonds have become monetized, they are a legitimate and very portable form of money. Gold is not truly portable because it is too heavy. Moving across a border with 1000 gold coins is impossible. Moving across a border with a million dollars worth of gem-quality diamonds is very possible.
I follow the diamond market closely. The Russians have been big buyers of large, expensive diamonds. Why? The Russian ruble has recently declined to record lows. The ruble has dropped three times in five days, to a level that has not been seen since 2003.
The central bank of Russia does not, normally, allow the ruble to drop more than 1% in one day. Yet, the ruble has shed more than 20% against the dollar since its high in early August. So is it any wonder that wealthy Russians are putting their rubles in diamonds?
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– Richard Russell
Dow Theory Letters
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The 2008 boom in U.S. Treasurys has been so big that they are now headed for a crash, according to Gloom, Boom and Doom Report editor Marc Faber.
"I think the big trade in 2009 will be to go short Treasurys massively – I really mean massively – because we may not have inflation for one, two, three years," Faber told CNBC.
"You want to be in gold, silver, platinum, and also oil," Faber advises.
"If you believe in a recovery of asset prices as a result of money printing, you should be in hard assets, particularly precious metals."
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