Bloodbath of the bonds | FT Alphaville

Bloodbath of the bonds

Tuesday’s rally on the S&P 500 turned out to be unimpressive.

A sharp rise in US Treasury yields — the 10-year increased 21 basis points and the 30-year 21bps — dampened investor euphoria, leading the S&P to close just 0.05 per cent up on the day. Jitters in the bond world seem to be emanating from the decision to extend the US tax cuts and its impact on the States’ public finances.

This then, is the 10-year on tax cuts:

That chart is also from Marc Ostwald at Monument Securities.

And Marc — never one to shy away from a healthy dose of bond vigilantism — thinks the market’s ‘awakening’ to the (dire) state of US finances could be the catalyst for the end of a 30-year bond bull cycle. And not just in the States either.

As he puts it:

… [Tuesday] focus will be on the US 10-yr treasury auction, which stands under an ill star, namely that after years of conveniently ignoring the issue and instead focussing its efforts on pulverising the Euro area, there appears to be a realization that the US has a massive Federal debt problem, which has no intention of doing anything about until the economy has stabilized, by which time the situation is likely to be “well beyond the pale”. The [above] chart suggests that a very large long-term wedge is forming on the 10-yr yield chart, with short-term risk all the way up to 3.50% prior to some corrective consolidation, but once completed a test of the 30-yr downtrend [chart below] looks likely to be broken, and a run up to test 5.0% looks very likely, which will mark the start of a long-term bear trend in yields, not only in the U.S.A. but around most of the G7 and Eurozone (though arguably this has long been “work in progress” in Greece, Ireland, Portugal and to a lesser extent non-core Europe).

Which would be quite a reversal, judging from the below:

Related links:
Treasuries ditched – FT Alphaville
Soaring US bond yields spook investors – FT
Moody’s sees ‘definite negative’ for US rating. NOT. – FT Alphaville