Last week was pretty scary in the bond market.
Three auctions -- of two-, five-, and seven-year Treasurys -- flopped, as buyers, especially foreign investors, sat on the sidelines.
That triggered a huge sell-off in Treasurys, the world's most liquid fixed-income market.
Yields, which move in the opposite direction from bond prices, soared.
The yield on 30-year Treasurys briefly came within a hair of 5% before settling back to the 4.75% range. The ten-year note's yield hit 3.9%, driving 30-year mortgages, which are priced off that ten-year note, over the 5% mark.
All these rates are much, much higher than they were back in December 2008, when bond yields hit generational lows.
The poor auctions and subsequent dumping of bonds set off all kinds of alarms. Is inflation right around the corner? Are foreign holders of U.S. debt, the people we've counted on to keep financing our ballooning deficit, finally saying no mas? And is our low-interest-rate Nirvana gone for good?
My answers to those questions are: no, probably not, and probably.
I don't think inflation, especially hyperinflation, is anywhere on the horizon. And I don't believe foreign buyers are giving up on U.S. debt -- for many of them, it's practically the only game in town.
But in the wake of the crisis in Greece; rumblings about Portugal and other European countries; worried noises by rating agencies about the creditworthiness of the United Kingdom and the U.S., and last week's signing into law of President Obama's mammoth health-care reform bill, foreign and domestic buyers may well demand higher interest rates to compensate them for the perceived higher risk of owning U.S. government debt.
Last week's big surge in rates is also getting the attention of some savvy technicians who think we could be at a major turning point for bonds.
Pamela Aden, who with her sister Mary Anne edits the Aden Forecast, a technically-based advisory service that follows big trends in stocks, bonds, commodities, and currencies, says bonds are threatening to reverse trends going back nearly three decades.
She cites the following chart (reprinted courtesy of the Aden Forecast), which traces the yield of the long bond back to the Depression year of 1930:
As you can see, the yield on the 30-year Treasury peaked above 14% in 1981, then started a steady decline to its late 2008 low of 2.6%. It's rebounded since then, along with the economy and the markets, as fears of financial collapse faded....MORE