If aliens landed on earth today and asked, "Take Us to Your FINANCIAL Leader," the final destination would not be the White House. It'd be the Eccles Building, the famous headquarters of the Federal Reserve Board.
The story goes that the Fed is the all-knowing, infinite-power wielding "OZ" of the U.S. economy. With the flip of its monetary-policy switch, the central bank can manipulate the course of any financial market in the direction of most benefit.
In early 2009, said market of choice was... the U.S. bond market. At the time, long bonds had just experienced their strongest year-to-date performance since 1982, while 10-year Treasury note yields stood at their lowest level in five decades.
With the U.S credit market buried beneath an icy block of defaults and delinquencies, Fed chairman Ben Bernanke saw one surefire solution to thawing out the sector and getting liquidity gushing through the system once again: Keep bond yields at record lows to stimulate home LOAN-ership and consumer financing.
As for how the Fed would accomplish this goal -- the plan was two-fold: First, the central bank would cut its target rate to a record low of 0%. Then, (on March 16) it would purchase $300 billion of long-term Treasury debt (on top of the $1 Trillion in mortgage-backed securities).
To the mainstream experts, the strategy was fool-proof. They believed that long bonds would follow the Fed's lead and keep yields at accommodatingly low levels. Soon, bullish expectations for long-term Treasury debt flooded the scene, from sentiment charts to news columns, such as these February-March 2009 clips below:
February 11 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."
This March 14 Bloomberg:
"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... "
And this March 19 Reuters:
"We always knew that if the Fed did use this clearly powerful bullet, it would cause a huge drop in yields. It's wonderful for Treasuries. Investors can have absolute confidence" in them.
Yet -- as it turned out, said "powerful bullet" (i.e., the $300 billion purchase of long-term debt) shot blanks. 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%.
Here's where those alien visitors got back in their UFO and returned to their home planet.
Fact is, the Fed's inability to move the bond market through rate cuts and bailouts was a foregone conclusion. One, in fact, that Elliott Wave International's analysts made clear from the get go, as the following excerpt from Robert Prechter's March 2009 Elliott Wave Theorist makes plain:
"Market sentiment in Treasury bonds is consistent with a peaking process and it's difficult to imagine more 'comforting' news than the supposedly all-powerful Fed buying an investment. The quality of T-bonds as an investment should become increasingly suspect over the coming months. If one is investing in Treasury debt, it seems especially prudent now to stick with the shortest-possible maturities. Record spending by the government along with sentiment readings reflecting extreme optimism toward T-bonds suggests higher long-term rates ahead, no matter what the Fed does."