On March 29, the sharpened bear claws officially came out of bond land. That day, yields on the 10-year Treasury note rose for a ninth consecutive session sending prices lower in the market's longest losing streak in over 20 years.
And, according to the mainstream experts, one main factor was behind the powerful decline: namely, rumours that the Federal Reserve will cut short is second round of quantitative easing, a.k.a. QE2. Here, the following news items set the scene:
- "Treasury's Post Longest Decline Since 1990... As anxiety grew that the Federal Reserve could end its easy-money-policy before many investors expect." (Wall Street Journal)
- "The [bond] market is concerned about how soon QE2 will be terminated or whether they will even stop short of implementing the full package." (San Francisco Chronicle)
I have just one question: How could the "threat of QE 2's end" have triggered the recent rout in Treasuries when bond prices have actually been falling since QE2 had begun?
Fact: In late July/early August 2010, the reality of "QE-Lite" -- as it was first dubbed -- hit the financial webosphere as a "crucial step" in the Fed's mission to prop up the fledgling U.S. economy. QE2's actual launch date was a mere formality, and came two months later, in early November, when the Fed put an official $600 billion stimulus stamp on the QE2 package.
YET -- during that entire time, since late summer, bond prices were sinking. Here, the following chart of iShares Lehman 20+ year Treasury Bond Fund (NYSE:TLT) puts the fallacy of a "Fed-led bond rally" into focus:
This is not an isolated incident. Fact is, round one of the Fed's quantitative easing took place over two years (September 2008-September 2010) and totaled $2 trillion. A year into QE-1, the mainstream experts were fully on board the bond-bull bandwagon and its Fed-driven conductor. One February 11, 2009, Time Magazine cover story included an illustration of Uncle Sam holding a Treasury note with the caption: "I WANT YOU TO BUY THIS BOND," and wrote:
"There are fundamental reasons why Treasury prices will move higher (and yields lower), and why the current opportunity to go long US Treasuries should be grasped with both hands."
And this March 14, 2009, Bloomberg news clip:
"The underlying and most compelling trend now is that bond yields will stay low. The Fed made it clear it doesn't want to see yields rising... "
Yet, at 2009's end, long-term U.S. Treasury bonds delivered their worst year on record: the 30-year T-bond plunged 26%, while the 10-year T-note fell 9.7%.
In the end, Elliott Wave International has made one truth clear: "When government tries to drive a market in a given direction, prices rarely cooperate."