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29th September - The bears are weighing on US Bonds

02 October 2017



The range is clear. There is no breakdown yet. Bears must wait for a push beneath 122.71 before gaining certainty.


The detail of the continuation chart reveals a critical diagonal resistance (prior support) that has driven the market back down.

The bears look to be in charge (in the medium-term) for a likely retest of the 122.71 low


Since the financial crisis US Bonds have been in demand, not least due to the Fed having bought trillions of them during its QE program, but also because US inflation has remained benign and until the Fed began to hike last December, interest rates were close to zero.

Even now inflation remains benign and interest rates are still very low by historic standards, but the Fed has changed course. At last week’s FOMC meeting the Fed made it known it was set to begin reducing its boated balance sheet by not re-investing all the proceeds from its bond holdings as they mature, but in truth that was broadly expected.

What wasn’t expected was the Fed’s announcement that interest rates would likely rise again this year with additional increases next year. When the Fed first began preparing the market for a balance sheet reduction program, its stance on interest rates was that they needn’t rise during the initial stages of the balance sheet reduction program.

One of the reasons was benign inflation. But more recently the Fed has adopted the view that benign inflation is likely transitory and will likely be pushed higher by the tightening labour market.

In her speech this week Yellen spoke of inflation and the need for policy to be adjusted, but that adjustment mustn’t now be too gradual; another departure from the Fed’s previously long held position.

But there is another factor at play that determines the price of US Bonds.

When Donald Trump was first elected President there was much talk and excitement in the financial markets about the so called Trump trade. As part of his policy platform Trump wanted to renew crumbling US bridges, renovate dilapidated school and Hospital buildings, rebuild the military and at the same time cut corporate and personal tax.

The reaction in markets was a Dollar rally as traders judged the result would be a growing budget deficit, rising inflation and a more active Fed, but Trump so far has been unable to deliver, leading traders to un-wind their long Dollar trades, as until recently, the Fed stuck to its familiar approach to gradual monetary policy adjustments.

However, just as the Fed has decided the time is now right to reduce its balance sheet and continue raising interest rates, Trump has resurrected his tax reduction plan and announced his intention to reduce US Corporation tax.

The impact on US T notes has been clear to see; they have started to sell off.

With the Fed no longer holding the market up at the same time as Trump potentially begins growing the budget deficit, Bond yields will surely rise.

If Trump was planning to cut tax, and at the same time cut spending, the market would be relaxed. But that isn’t his plan. Can he get his policy into play? That is the question.

The coincidence of a more aggressive Fed and an administration focused on cutting tax while growing spending is a negative development  for bonds. This market could be on the verge of the long-anticipated Bear market.

The ball is in Trump’s court!

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6th October - Watch Cable- it is set to weaken a lot further

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21st September - Wait and watch for a Dollar break

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