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March 27, 2006

On Hold

Today's markets were pretty much a bore as traders await the first utterances of the Bernanke Fed. The more I read, the more I am convinced that traders expect Bernanke to ease the language tomorrow. I beg to differ, and stated my reasons on Friday. In any case, I won't complain about trader fickleness because it's an attribute that provides opportunity to those who read it properly.

Silver and gold both posted solid gains, helping boost Newmont Mining above $50 again, and pushing Pan American Silver to an all-time high. I do wonder whether metals will suffer if I am correct in my assessment of the expectations surrounding tomorrow's language. Half of me hopes metals will get knocked. I closed my trading positions at lower prices, and would love to find an attractive place to buy them back.

Perhaps lost among the incessant drone of yawns today was the fact that US Treasury bonds continued to slip. The 10-year fell a little more than a quarter point while the 30-year fell more than a half point, pushing yields up to 4.70% and 4.73%, respectively. Despite the rise in yields, tomorrow's Fed Funds hike will push the Funds rate above that of long-dated Treasuries. Such inversions almost always precede recession. Bernanke would have us think that this time is different… that long rates are remaining low due to low inflation expectations. His stipulation is farcical because it begs the question of why precious metals prices are shooting through the roof.

Back on the street, analysts would have us believe that Treasuries will rally once the Fed quits. If that were to be the case, why would bonds fall today ahead of anticipated language to the affirmative? No, I stand behind what I've been saying for months: that Treasuries will collapse once the Fed is done. It seems counterintuitive only until you understand the reasoning. The Fed giving up on hikes will be interpreted as the Fed giving up on the dollar. Pressure on the dollar is already in the system, and if traders believe the dollar's support is being removed, they won't want to own any dollar-denominated assets, including Treasuries.

Disclosure: Long NEM Calls


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