Bond Market Indicating Risk On Environment?

If you follow my work, you know how the Bond market is crucial to my analysis. It is the largest market in the world, and we are heading to a period where central banks really have no ammunition anymore and are using rhetoric to maintain confidence in the system.

The history of humanity is cycles of hard money and soft money. It seems we are reaching the end of this soft money cycle. Of course Ray Dalio mentioning how there are many similarities to the 1930's-40's.

Today we are hearing about the repo market. How money has to be injected to ensure the system is propped up and interest rates do NOT spike up to double digits. Lot of argument whether is is Quantitative Easing ( QE ) or not. Remember, the Fed cannot mention QE because it could trigger a confidence crisis. QE was supposed to be a one time desperate policy to prevent another 1930's like great DEPRESSION. If it is mentioned we are on QE again people will realize that central bank policies did not work and we are stuck in 0 to negative interest rates forever with QE infinity.

QE was a way to inject money into the system by the Central bank buying up bonds. Repo is when the central bank directly gives money to the banks and receives collateral in return...they say this is US treasures but it could very well be toxic assets. The difference between QE and Repo is really new bonds/debt vs old bonds/debts. It still is about injecting money into the system to more importantly, keep interest rates suppressed.

Because of this environment, I have said bonds are a great long term trade because central banks will be cutting to 0. Specifically Canadian bonds because I believe the market has not priced in Canadian rate cuts until this past week.

Historically, bonds are not meant to be traded. As the European Fixed Income traders say, we basically buy bonds because we believe we can sell it to a greater fool who will buy it. Bonds brought in reliable income, and a decade ago when you retired with say 1,000,000 dollars, you would buy government bonds yielding 5-8% at the time which would provide you with 50,000-80,000 a year...which is enough to live off when retired. Today you would get 15,000-30,000.

When Central Banks started QE and began keeping interest rates low, they caused money to flow to the stock market and real estate as money had to chase yield. Again, if you follow my work, today there is nowhere to go for yield EXCEPT the stock markets and why I think they will continue to go up.

So let us look at the bond charts. So I am showing the yields. Remember there is an inverse relationship between bonds and yields. When bonds go up the yield drops and vice versa.

On the ten year yield, we have a potential bottoming pattern here. Yields bounced at the important support level of 1. 40 . I am one who believes the Fed will cut one more time this year...something the market has not priced in yet but could very well be pricing in the closer we get to December. This is what would keep yields dropping lower and bonds moving higher as more people price in more rate cuts.

This move in yields currently may be a relief move. We have trended (downtrend) for sometime with multiple waves.

We have broken into all time new highs in stocks (again not surprising if you follow my work. Have been saying this would happen because of chasing yield). When people buy stocks and exit bonds, we call this a risk on environment. Whereas when one sells stocks and goes into bonds, we call this risk off. Remember, money managers cannot really be in cash all the time. It has to be working somewhere and most of it goes into bonds during times of uncertainty, volatility and risk etc.

The Bond chart is also showing a topping pattern (so remember inverse with yield):

Just a crazy environment we are in really but continue to watch the Bond market. I expect in the longer term bonds to go higher because central banks will cut rates even more. We then get to a point, which Ray Dalio calls the paradigm shift, where it will not make sense to buy and hold bonds (currently you can still sell it to a bigger fool).


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