Quote du Jour: Bond market is in rebellion, says Bill King

By Prieur du Plessis, on December 16th, 2010 posted in: Bonds, Investment

Bill King, Chicago-based author of insightful The King Report, said the following about the sell-off in the government bond market:

“With bonds in collapse, a choir of know-nothings and know-littles are braying that the reason for the bond carnage is belief that the economy is improving. The concept of bonds acting inverse to the economy has been thoroughly debunked. In the eighties bonds rallied sharply while the economy staged magnificent growth. In the nineties bonds continued to rally as the economy grew. In fact, bonds have been in a 28-year rally. Was the economy in the toilet for 28-years? Of course not!!!

“Bonds are tanking now because of inflation and currency debasement fears due to QE. At first the Fed could bully the bond market higher. But the Fed has crossed the line; so now bonds decline with QE 2.0. The recent bond decline on QE 2.0 is extremely significant because for two decades the Fed, BoJ and PBoC have generated artificially low interest rates via currency and interest rate interventions.

“But the bond market is now in rebellion due to mushrooming sovereign debt. Checkmate is near as the market is chasing ‘kings’ all over the globe.”

The chart below of the 10-Year Treasury Note show how the yield has reversed course early in October, firstly breaching the 50-day moving average and more recently also the key 200-day line. Considering the gradient of the yield increase and the rate-of-change indicator (bottom panel), bonds have possibly become oversold in the short term and could mean-revert back to the 200-day line. But short-term movements aside, the chart action has the makings of a primary trend reversal, after 28 years of declining yields, and I will be surprised not to see yields rise for quite a number of years to come.