Is Bernanke the juggler losing control of the bond market?

On July 8, 2013 by Phil Champagne

3 weeks in a row with rising rate.  This last Friday, we finished the week with a big move up that push the rate above the high of last week. The focus on the 10 year treasury note yield is important since it is basically the floor to any other interest rate of the same length, including of course commercial real estate mortgage interest rate. With this recent rise, properties that before we could consider at a given purchase price are now out of our targeted acquisition because of the more expensive financing.


The major explanation for this from the mainstream media was the market got scared of Ben Bernanke‘s recent statement a few weeks ago that they may “taper” the current quantitative easing (ie: this fancy word for printing new dollars out of thin air). We know very well that the Federal Reserve actually cannot taper and will not taper, this current QE3 is here to stay. If they ever stop QE, the interest rates would be rising quite more than what we have seen here. Gosh, they just said the word “taper” and it went up by 100 basis point. Rising rates would mean the cost of borrowing for cities, states and also the Federal Government be quite more steep. A string of bankruptcies commencing with municipal bonds would sweep through the market, making the bond holders even more weary and creating an additional panic. Politicians and central banks will prefer to avoid if possible or otherwise delay any major problems they face. So in fact, it’s not tapering that is in our future but rather just the opposite: they will keep increasing the quantitative easing programs. Just the current government spending alone will require this QE to be maintained.

benthejugglerThere is a huge derivative market based on the interest rates and if this keep going up, it will generate some drastic problems, not to mention a complete freeze of the commercial real estate markets. So why did Bernanke scared the market with the word “taper”? I can see a few possibilities:

The Federal Reserve is printing $85 billion per month with this current QE which keeps yield on short term treasury bond low but does not alter long term yield. They have currently little or no control over long term yield but only able to juggle and manage bond investors expectation with elaborate statements. When they started talking about tapering, was it because they could see this trend coming and wanted to give the appearance to the general public they are still in control? That they are responsible for this recent rise by saying the word “taper”. I tend to believe this is the explanation. If this is the case, then expect that at a certain point, this recent rise will produce some very negative result on the economy and will open the gate for the Federal Reserve to come up with an additional QE on top of the existing printing which, this time, may focus on the long term yield. Once that happens, expect some important inflation and very sharp V shape recovery in gold, silver and commodities. I personally did not wait til then to buy though, I took advantage of this great bargain. We may already have hit bottom.

Another theory I have seen floated states the Federal Reserve is experimenting with the bond investors expectations (another version of Ben the juggler). In such a case, it is sort of a stress test to see how the market would react, or perhaps to make them believe they have no relationship with Zimbabwe, that they know they need to “remove the punch bowl” when the party is going too strong. And of course, if this is the case and they do have control, expect them to change their wording to reverse this current trend. Already a few Fed bankers have come to say the market misinterpreted what Bernanke had said, although we have not seen a reverse yet which tend to invalidate this theory.

Sometimes we need to look at what is said in the mainstream media to get clues on what the real possibility it could be. The video from ABC below seems to indicate my belief that they are not in control in this recent trend rise but trying to get credit for it. If this is the case, we will see this trend maintained until at least the Fed comes up with an additional QE program. With artificially low rates set by government entities, it is like a rent control on money (interest rate = rent), and always lead to a correction. The longer and more pronounced the artificial setting, the more drastic the correction.

Clearly, we are not the only one reporting on this. Look at this recent ZeroHedge article.

The safe bet right now is investing in gold and silver and getting some cash flow indexed for price inflation. Real Estate is a great investment for this purpose. As long as we will have federal spending, quantitative easing and low interest rate, it will lead to a dollar devaluation and real estate with a proper use of debt can protect and boost your return, as long as it is done right. If you want to learn more about us and how we do it, feel free to contact us.

Disclaimer: I am long gold and silver, well and real estate of course.

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