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Friday, June 28, 2013 1:41 PM

Calmer Waters for the Bond Market? Gold? Worst Over?

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Curve Watchers Anonymous has its eyes on the bond market as the quarter comes to a close today. It's been a very bad stretch for US treasuries as the chart below shows.

Yield Curve as of 2013-06-28

click on chart for sharper image

  • $TYX: 30-Year Long Bond Yield - Green
  • $TNX: 10-Year Treasury Note - Orange
  • $FVX: 05-Year Treasury Note - Blue
  • $IRX: 03-Mnth Treasury Bill - Brown

The above chart shows the monthly close for the treasury symbols, except the current month is month to date (with the close coming up today).

$TNX Daily

That last candle is a feed error. The 10-year yield did not swing 50 basis points today.

So, while things have calmed down a bit over the past week, the 10-year yield has climbed from 1.614% to 2.551%, a rise of 93.7 basis points since the beginning of May.

Impact on Housing

The selloff in mortgage backed securities has been even worse. Mortgage loans have risen by as much as 175 basis points.

For details, please see 10-Year Treasury Yield Up 100 Basis Points Since May; What's That Mean for Mortgage Rates and Housing Affordability?

Gundlach Sees Calmer Waters Ahead For Bond Market

MarketWatch reports Gundlach Sees Calmer Waters Ahead For Bond Market
“From the frying pan into the fire.”

That phrase came up repeatedly during Jeffrey Gundlach’s ad-hoc webcast Thursday as the DoubleLine Capital chief executive sought to calm shaken bond investors.

His comments reflected the role that the bond market’s biggest names have recently taken on in soothing fears about the asset class after a panicked global selloff in recent weeks. Pimco’s Bill Gross also advised investors Thursday against jumping ship.

For those thinking of fleeing bonds for greener pastures, Gundlach’s webcast fittingly started with a review of gold GCQ3 +1.05% , which has taken a dive in recent days.

“Gold looks like death,” he said.

Nonetheless, the choppy seas of the bond market are giving way to smoother waters, he said. The 10-year Treasury note 10_YEAR +1.94%  yield fell 6 basis points Thursday to 2.475% after hitting a high of 2.66% last week.

“I do think the worst is over. Now we have corroborative evidence from the markets,” Gundlach said.

With the markets settling, there are deals to be had.
Markets Settling? Worst Over?

For starters there is scant evidence the treasury market is settling. Yield on the 10-year note is up to 2.517% today from 2.475% yesterday.

The weekly action looks no different that similar consolidation action in the middle of May and the middle of June. After similar-looking consolidation periods, yields blasted higher each time.

Given action in the $HUI, a better case can be made that gold is settling.

$HUI 2-Hour Chart

That's a pretty dramatic reversal in unhedged miners.

Is the bottom in? I don't know, nor does anyone else. Nor do I know whether or not a short-term top in treasury yields is in.

End of Treasury Bull Market

What I do know is that Bill Gross proclaimed on May 10, Bull Market in Bonds Is Over.

Bill Gross said the three-decade bull run in bonds ended last week when the 10-year Treasury yield hit 1.67%. The manager of the world’s largest bond fund stressed that a bear market in bonds won’t start until economic growth and inflation pick up — an arrangement that he doesn’t expect to see immediately.

"Tweet" from Bill Gross on May 10

"@PIMCO The secular 30-yr bull market in bonds likely ended 4/29/2013. PIMCO can help you navigate a likely lower return 2 - 3% future."

Let's assume Bill Gross is correct. And if he is, then there is little value in bonds. There was negative value in them at the time Gross made that tweet.

It's hard enough to navigate a cyclical bear market. And it's a brutal mistake for investors to believe they can navigate a secular bear market in anything, especially on the long side.

Since 1980, treasuries have been in a secular bull market. Investors have not known anything else. Might not Gross be wrong when he says "a bear market in bonds won’t start until economic growth and inflation pick up."

I think he already is, by any reasonable definition. If the bull market is over, a bear market has started.  

It remains to be seen if the secular bull market in gold is over, but if I believed that, I would not be heavily in gold.

Mike "Mish" Shedlock

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