Faith in Central Banks Again in Question: Ominous Implications for Bonds

All eyes are following implications of a yield curve inversion. A crucial portion of the curve signals something else.

I have been tracking, as has nearly everyone else, the constant flattening of the yield curve to the point that portions of the curve are now inverted.

Despite the near-relentless flattening on most portions of the curve. the 30-year to 10-year spread started diverging in July.

I have been watching this for weeks and the 30-year yield is the fastest to rise and slowest to drop on a relative basis. Here are a couple of recent screen shots to show what I mean.

Relative Weakness of 30-Year Bond

This does not happen every day, but on balance it has been happening since July 9.

What's It Mean?

  • This is not necessarily easy to decipher, and perhaps it is just random and means nothing at all.
  • However, I suggest the long bond is signaling huge concerns over increasing deficits and mounting debt, now over $21 trillion.

Fed Rate Cuts

The bond market has also signaled the end of rate cuts. I posted charts yesterday in Rate Hike Odds Dive: Any Rate Hikes in 2019? Sucker Rally? Musical Tribute!

Yesterday I asked: Rate hikes coming? Full inversion?

With a tribute to Buddy Holly, here was my answer: Maybe Baby, but I doubt it.

Enter Kudlow

Today we see that White House economic adviser Larry Kudlow expects pause on Fed rate hikes.

Recession Coming 2019, Full Inversion Not

I think a recession in 2019 is now baked into the cake.

If so, and if the Fed does stop hiking, I doubt the 3-month to 30-year yield curve inversion that people seem to expect will occur.

Gold vs 30-Year to 10-Year Spread

Gold's action roughly matches the direction of the 30-year long bond to 10-year treasury note spread. Bear in mind this just started happening in 2006 following a long pause in the issuance of the 30-year bond.

Longer charts do not show that correlation. But other spreads are completely random.

So, What's That Mean?

  • Again, it could be totally random.
  • It could also mean waning and increasing concerns over enormous debts forever into the future.
  • I have long been a proponent that gold will take off once it becomes apparent the Fed will not get in the rate hikes that were implied. If so, and if the Fed does pause, gold is one asset class that rates to do well.

Faith in Central Banks

Click on chart for larger image.

Yesterday, I Tweeted that gold was a measure of faith in Central Banks.

I received no answer from Schiff, but others did join the conversation.

Q&A on Deflation

I failed to note 2000-2001 in my answer. There was a tremendous credit bust due to bad loans to dotcom companies and bank loans to South America. The Greenspan Fed responded with another bubble and gold took off.

In the real world, it's credit and the value of credit on the books of banks that matters. We saw it in 2000, in 2007, and we are going to see it one more time.

Central Bankers Are Bureaucrats

Contemplating the End of the Bond Bull

In recession, I expect long-term yields to drop. How far?

I do not know. But the implications are clear.

Implications

  1. The long-bond is signaling a huge warning that the next move down in yields will be the last one.
  2. That signal is consistent with warnings over increasing deficits and mounting debt as far as the eye can see.
  3. It's also consistent with decreasing faith in central banks, especially the Fed.

The wizards at the central banks are likely to do nearly anything to prevent a credit wipe-out.

Add it up and a strong gold bull market seems highly likely.

Mike "Mish" Shedlock

Comments (27)
No. 1-10
Bam_Man
Bam_Man

I couldn't agree with you more. I see one more HUUUGE rally in US Treasuries (as a 'safe haven' of all things) following the onset of the upcoming recession. Then the Fed will undoubtedly panic (big time), driving the dollar down the drain and that will be the catalyst for the end of the decades-long Bond Bull. In the meantime, Gold will get very, very expensive and difficult to find.

sunny129
sunny129

As long as the price of PHYSICAL GOLD is NOT delinked from the price of the PAPER Gold determined by gold futures/exchanges aka under the govt influence, the gold physical/paper will go no where, especially if deleveraging DEFLATION down the road destroying the asset bubbles built up on debt.

Except for a minimal physical gold as an insurance, most of the money (in keeping the purchase power) will be made in going against the deflating Mkt bubble with hedges. CASH will remain the king just like in depression. Gold is just TALK.

If the FED wants to pause and cut rates, it is powerless against looming recession in 2019. A rate cut of 4% is the minimum to affect the economy! Where will they go below from the current 2.505?? NRP and QE4?

Ted R
Ted R

Spot on Mish. Looks like all the debt is finally going to start biting the economy on the as*. The implications of this are beyond frightening. Time will tell

AWC
AWC

Looking at the price of gold in VEF (Venezuela), 303 Million per ounce, I'd have to agree that it constitutes the ultimate long term hedge. But then, it does have quite the history of that, no?

SMF
SMF

The issue is quite simple: There isn't and there won't be enough money to pay for all the debts and promises that governments have made over the last few decades.

Most, if not all bureaucrats know this, but they are not there to solve problems in the first place, as kicking the can is what they know to do best.