According to conventional economic wisdom, the Federal Reserve is to the U.S. bond market what a hypnotist is to his patient. A typical trance would induce the following behavior: "When you hear the words 'rate cut' or 'cash infusion,' you will proceed to act like a BULL and rally."
In reality, however, the bond market completely ignores the "soothing" voice of the Central Bank. Then it does whatever the hooey it wants.
Case in point: Since the start of 2009, the Fed has carried out a monetary-easing crusade of unprecedented scale, resulting in the duel March events known collectively as "AIDZILLA." To wit:
March 18: The Federal Open Market Committee announced a new plan to transfuse an additional $1.5 Trillion into the anemic economy, including the purchase of larger US Treasuries.
March 25: The Fed authorizes lending of $300 billion to private investors for distressed asset purchases.
This combination was the single largest inflation creating scheme in U.S. history. If EVER there was a time for the "suggestive" power of the Fed to produce a bullish trend in bonds, it was then. And that's exactly what the usual experts expected to happen, as the following news items from the time make plain:
- "Fed's Purchasing To Weigh On Yields." (AP)
- "Government Efforts Help To Stabilize the Lending Markets" (Wall Street Journal)
- "The moment still belongs to the bulls. Buying government bonds helps lift pries and push down yields." (Dow Jones & Company)
Yet -- in the days and months that followed, yields for longer-term Treasuries soared.
Let us recap. The Federal Reserve launches the most significant inflation-inducing strategy EVER, and -- Treasury yields enjoy their longest weekly UP-streak in five years.
Here, the May 22, 2009 Short Term Update presents the following close-up of the 30-year Treasury Bond Yield since July 2008. (Elliott Wave labels have been removed for this publication)
Clearly, the Fed's policies have no "hypnotic" effect on bonds, a message aptly conveyed in the May 2009 Elliott Wave Financial Forecast. There, our analysts deliver this important message:
"Investing in accordance with government edicts and actions can be hazardous to one's financial health."
In the end, the truth is once again in complete opposition to mainstream lore. The bond market leads. AND, the Fed eventually follows.
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