World markets were gripped by fear over the past week, as the stock market saw its worst weekly decline since 2016. The cause of the fear? Rising bond yields – or as we prefer to state inversely: falling bond prices. U.S. 30-year bonds fell by over 3.0% for the week. A massive decline for a market in which 1% moves per week are rare. Yields have now risen to 3.08% per year for the 30-year bond from 2.10% in 2016.  “It’s all driven by bond yields,” said Rebecca Patterson, chief investment officer of the Bessemer Trust. “It’s not that the level is that frightening, but the speed of the move is causing anxiety.”

The markets are finally starting to pick on the thesis that we have been proposing for two years now: bonds have formed a long-term multi-decade top. The last top of this magnitude occurred in the year 1950 after bond-investing following World War II abated. Assuming one begins to follow the financial markets after university at age 22, only those born before 1928 have ever experienced a long-term top in U.S. bond prices. This decline is only just beginning.

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We continue to ask: how are indebted governments going to fund themselves if interest rates are set to continue rising for years or decades into the future?

Of course, the answer to the above question is: central banks are going to print whatever money is necessary to make up the difference. When caught between a rock and a hard place and with a license to print at will, central banks will always choose the hard place: devaluing the currency.

Irrational Markets?

Unfortunately, we can be right fundamentally, but on the wrong side of the market, and this is a principal theme in this series of articles. Indeed, let us truly consider the chain of events that occurred this week:

  • U.S. long-term bonds suffered their worst weekly decline in years.
  • Bonds are a promise to receive payment for dollars in the future.
  • Yet what was the only asset class to hold its value this week amidst the panic in bonds? The U.S. dollar.

So the market rushed out of dollars in the future and into dollars in the present. We must remember: markets need not be rational. The adage “markets can stay irrational longer than you can stay solvent” remains quite prescient.

Gold did not act as a safe-haven this week, declining over 1.3%. Yet we expected this decline based on the technical analysis of past weeks showing a likely zone for an interim high was forming (click here).

Broad Asset Comparison

Let us first examine a broad asset comparison for the week to clearly see what unfolded:

1-Week Comparison

The U.S. dollar acted as a refuge this week as all other asset classes were sold in fear. The dollar finished near even for the week.

  • Gold declined 1.3% intraweek, tracking closely the decline in broad commodities, which fell 1.5%.
  • U.S. bonds plummeted. The U.S. 30-year bond fell over 3.0%.
  • U.S. stocks as represented by the S&P 500 declined nearly 3.9%, the worst decline in two years.
  • Senior gold miners leveraged losses in both gold and stocks, falling over 7.5% for the week.

Federal Reserve Meeting

Janet Yellen’s final meeting as Fed chairwoman came and went this week. The meeting itself was a non-event, as the central bank has held interest rates at its present 1.25 – 1.50%. The bank continues to target inflation in the 2.0% range as an official policy and sees the employment market in the U.S. remaining stable.

While it was not so much the official Fed statement which impacted markets this week, the subsequent interview with former Fed chairman Alan Greenspan (1987 – 2006) was one of the more shocking interviews we have ever heard given by a Fed official, past or present.

Specifically, Greenspan’s language regarding the existence of bubbles in both the stock market and bond market seemed to be the impetus for the selloff this week we saw in both U.S. asset classes.

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If you did not have a chance to watch the interview, this 1:46-minute clip from Bloomberg will be well worth your time: https://www.bloomberg.com/news/articles/2018-01-31/former-fed-chair-alan-greenspan-sees-bubbles-in-stocks-and-bonds.

To borrow a theme from mythology, the bottom line for the bond market is that: “the genie has been let out of the lamp.” Fear is now palpable in the largest debt market in the world, and it is going to be much more difficult to get that fear contained now that it has been unleashed.

How ironic, that the man largely responsible for the stock market bubble of 2000 and the credit crisis of 2008 may have single-handedly kicked off the most dynamic part of the bond bear market that we have been anticipating on the charts. Well played, Mr. Greenspan.  


Christopher Aaron
Bullion Exchanges Market Analyst

Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. His strategy and technical analysis have his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is provided as a third party analysis and does not necessarily matches views of Bullion Exchanges. Please do not consider this article as financial advice in any way.

Bullion Exchanges is located at 30 West 47th Street in New York City’s Diamond District and is open Monday through Friday 9 A.M. to 5 P.M. or online anytime at BullionExchanges.com.

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