Off the Cuff: US Treasuries – The Coughing Canary

In this week’s Off the Cuff with Mish & Chris podcast, Mish and Chris investigate:

• Risk “On”
  
  • Painful days for those holding precious metals, bonds or the yen
• US Treasurys
  • Are we seeing a game change of historic proportion?
• Not all numbers are trustworthy
  
  • The recently-released bank stress test results insult our intelligence

From now on, you’re going to hear a lot more about the US Treasury market. Rates are beginning to creep up, which for a global economy hooked on free debt is like sunrise to a vampire. The Treasury market is monstrous, and when it rolls over, it will take nearly every asset class down with it. Suffice it to say, we’re watching it very closely.

Risk “On”

Precious metals, bonds and the Japanese yen are all under pressure this week. Why? The market is beginning to doubt the Fed’s ability to hold interest rates at 0% (meaning higher rates are coming), so capital is seeking higher yields. Also, optimism about a global recovery is growing (whether warranted or not).

No surprise, Chris and Mish see a growing disconnect between actual economic activity and the superficial veneer of prosperity that massive liquidity creates. The asymmetry of risks make them very nervous about being long in this market.

The Canary Sickens

For an over-indebted global economy, higher interest rates are toxic. And since plentiful cheap credit from central banks has been keeping the system alive for the past several years, a reversal will very likely send things into shock.

Chris stresses the importance of keeping an extremely close eye on interest rates and the US dollar at this stage of the game.

Mish is concerned that there is no “good trade” when a true flight from bonds occurs. Parking in US dollars until the carnage is over may be the best bet. (Interestingly enough, a strengthening US dollar is exactly what the Fed is trying desperately to avoid right now)

Both Mish and Chris agree that if the stock market breaks down as interest rates rally there will be no place to hide — which they see as a likely possibility, as the entire global financial arena is so interconnected these days.