The Bond Crash: Who, Me Worry?

I don’t ever recall a plunge of this magnitude in such a small duration. Any word other than crash does not do it justice.
Look at the bar for this month. Now there’s a new definition for confirmation after the harami spike pattern that formed in May and June!
The only comparable chart is the 2000 top on the NASDAQ 100 Index.
Investors don’t seem to be worried, mainly because they believe that they will get all their money back if they hold bonds to maturity. Here’s an excerpt from yet another public service annoucement that we made, on May 16, 2003.
(08:32 AM) Teresa Lo: We have a few numbers dancing across the tape this morning.
(08:33 AM) Teresa Lo: We’ve just seen April Housing Starts and CPI.
(08:33 AM) Teresa Lo: Treasuries up more…to test yesterday’s high.
(08:33 AM) Teresa Lo: First, let’s look at the numbers.
(08:34 AM) Teresa Lo: The headline is: “US April Housing Starts Fall Sharply”
(08:34 AM) Teresa Lo: U.S. housing starts fell by a larger-than-expected 6.8% to a seasonally-adjusted 1.630 million annual rate, the Commerce Department said Friday.
(08:34 AM) Teresa Lo: The report was much weaker than analysts had expected. A Dow Jones Newswires-CNBC poll of economists predicted April housing starts would fall by 3.1% to a 1.725 million annual rate.
(08:35 AM) Teresa Lo: The April report showed that building permits, an indicator of future building activity, rose by 1.2% for the month to a 1.708 million annual rate. The rise in permits was larger than Wall Street’s expectations; the Dow Jones survey of economists had called for permits to rise by 0.5%.
(08:36 AM) Teresa Lo: Headline for CPI: “US April CPI Shows Biggest Drop In 19 Months”
(08:37 AM) Teresa Lo: WASHINGTON (Dow Jones)–U.S. consumer prices registered the biggest drop in 19 months in April amid a slump in gasoline prices, highlighting the Federal Reserve’s worry that the risk of deflation is growing slowly but steadily.
(08:37 AM) grenaud: is that the “lack of Inflation” the Fed is worried about!..imo
(08:37 AM) Teresa Lo: The Consumer Price Index fell 0.3% in March after a 0.3% increase in March, the Labor Department said Friday. The drop was mostly due to energy prices, which fell for the first time since December. The core index, which excludes food and energy items, held steady for a second consecutive month.
(08:38 AM) Teresa Lo: Glen – All I can say is that back in the Paul Volker days…if you dared to use your imagination and say that 23 years from now yields would be at an all-time low and deflation would be a concern, he would have fired you on the spot, I think.
(08:41 AM) Teresa Lo: And I think that highlights the fact that the New Environment declared by Bill Gross on CNBC yesterday now makes you wonder if this might be some sort of spike in the making, a low spike in yield, after a 23 years bull market in bonds.
(08:42 AM) Teresa Lo: As I said yesterday, it was fetted on TV just a little too much, I think, given the setup going into this.
(08:42 AM) Teresa Lo: Now, seeing that it is a 23 YEAR bull market, I am not expecting any possible top to happen in one day.
(08:43 AM) Teresa Lo: It will be just like the Net Era…where people might have to short and short and short. Go broke covering into (or helping to create) a spike and THEN that’s it, since there will be no more bids from buyers or shorts, when everyone is long.
(08:45 AM) Teresa Lo: And it’s interesting to note that Bill declared bonds DEAD maybe 6 months ago, I think.
(08:46 AM) Teresa Lo: I have to read his article completely first, but on the surface, it seems to be that he’s reversing his position, after it’s done a whole leg up.
(08:47 AM) Teresa Lo: Like how Henry Blodgett et al valued companies with no earnings with a New Era “dollars per set of eyeballs” valuation back in 1999.
(08:48 AM) Teresa Lo: Anyway…like I said, it’s not our job to short this.
(08:48 AM) Teresa Lo: It’s our job to know this:
(08:48 AM) Teresa Lo: That with bonds and notes, at least we know that once the REAL RATE of return is NEGATIVE, then it’s gone insane.
(08:49 AM) Teresa Lo: And personally, I wouldn’t lend anyone any amount of money at today’s rates. It’s just priced for perfection, or even beyond perfection.
(08:50 AM) Teresa Lo: In my opinion, as discussed months ago, I think the Fed is attempting to engineer a negative interest rate environment, and add that to the weak Dollar, you have…INFLATION – down the road.
(08:50 AM) Teresa Lo: It’s a big, big long-term macroeconomic scenario that I’m talking about. We can’t reduce it to a single day.
(08:50 AM) Teresa Lo: Or even a single month.
(08:52 AM) Teresa Lo: I remember telling people for months in late 2002 that the market had that quality where it was going down but dribbling only…that in the big picture it was going to be an important low…but it was not for us to buy, but to make sure we don’t get stuck on position shorts, and you know the heat I had to take.
(08:52 AM) Teresa Lo: So here we are again…this time with bonds. Again. It’s not a time to short. It’s a time to make sure you know the bottom line, and make sure that you have a stop loss in there. It’s a disaster prevention warning.
(08:53 AM) Teresa Lo: That no one heeded for equities in January 2000 when Qualcomm rang the bell, and we wrote that one piece that was widely circulated.
(08:54 AM) Teresa Lo: And if we watch it carefully, we can study it along with that article “The Philosophy of Tops” that Justin Mamis wrote in 1987, just before the Crash, and how even professionals get nailed at the top fully exposed.
(08:55 AM) Teresa Lo: The bottom line is that the apparent reversal in stance and the declaration of a “New Environment” by Bill Gross has my ears perked, big time, particularly as it is happening into potential spike action on the monthly charts, while sentiment is heavily leaning towards bonds.
(09:01 AM) Teresa Lo: And one last thing…after the interview on CNBC…they showed public reaction towards bonds and it was funny. Most investors looked at them in a very positive light because they think that it’s a good thing to be able to hold until maturity and get your money back, plus a tiny bit of interest.
(09:01 AM) Teresa Lo: LOL.
(09:01 AM) Teresa Lo: But they forget to ask…what will be the MONEY ITSELF be worth?