The Markets Are Disobeying The Fed

The Fed’s additional round of quantitative easing (through large purchases of treasury bonds) was aimed at driving long-term interest rates lower. 

However, as soon as the Fed started hinting at QE2 in early September, interest rates on bonds began rising instead, driving bond prices down significantly. (Bond prices decline when bond yields rise and vice verse).

It’s been a trying experience for the large number of investors who have piled into bonds and bond funds over the last couple of years on expectation they would be a safe haven.

The bubble that formed in late 2008 as a result of that period of record buying burst and bond prices plummeted. And bonds have now given back most of the gains made in the early months of this year. 

30-year treasury bonds have now lost 9% of their value in three months. The 20-year T’Bond has fared even worse, having declined 15% in value, as measured by the popular iShares 20-year bond etf, symbol TLT.

I hope you listened when I warned you of our sell signal on treasury bonds. The ‘inverse’ bond etf, symbol TBF, designed to move opposite to bonds, has been the real safe haven, moving up as fast as bonds have been declining.


sy harding

Photo: Sy Harding, StreetSmartPost

Then there is the U.S. dollar.

The Fed’s additional round of quantitative easing was expected to drive the value of the dollar down further, helping to boost the U.S. economy by making U.S. exports less expensive in global markets.

The dollar did begin plunging again in September when the Fed first began talking about the possibility of QE2, and spiked down in early November after the Fed announced its decision.

However by then sentiment for the dollar was at a record extreme of bearishness, and short-selling of the dollar was at near record highs. Our technical indicators triggered a buy signal on the dollar, and the dollar has also defied the Fed by rising steadily since.

sy harding

Photo: Sy Harding, StreetSmartPost

Which brings us to gold. 

Another of the Fed’s stated goals for QE2 was to create some inflation, in an effort to inflate the economy into a stronger recovery.

Gold, the age-old hedge against inflation, initially responded by continuing its bull market, spiking up to a new high.

But after gold spiked up intraday yesterday to a new record high at $1,431 an ounce, it suddenly reversed to the downside by a big $23 an ounce, to close down $7 at $1,408. And today it plunged another $26 an ounce at $1,282, now under $1,400 again. 

Gold is being whipsawed by government actions, spiking up on the U.S. Fed’s easing decision, on expectations it will create inflation, and declining the last few days on expectations that China will raise its interest rates to ward off inflation.

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