Bond crisis near!
Our BUY Stop was triggered today for a new trade in the bond market. We suggested this trade because our models have been detecting some abnormalities in the markets. For a few years we have warned of a coming global credit and liquidity crisis. We are now moving deeper into this crisis.
Europe and Japan have destroyed their bond markets by introducing negative rates. For quite a while we have said that capital from Europe would escape the Euro and European bonds and move into the $US and US bonds. To play that trend we used an Exchange Traded Fund (ETF) to short the Euro, and another leverage ETF to be long the US bonds. Both trades have done extremely well.
What we are seeing now is a huge capital flow into the $US, here is the chart.
But as we can see during today’s’ drop in the equity markets, the bond market was also down, pushing yields higher. This is a nightmare for the central banks.
We have stated all along that there was going to come a point where the curtain is pulled back and the masses start to realize that those in government have lost control of the economy and have no idea how to solve this current financial crisis.
This is a problem that has been growing for the last decade when central banks started to interfere in the markets with their enormous stimulus programs, all the way to where we are now, with zero, and even negative rates. They have used up all their ammunition and the recession is not even here yet. Yes, the coronavirus certainly accelerated the problem, but this liquidity crisis has been looming for some time.
In Europe they have banned shorting of government bonds. When they make those kind of moves it tells the markets there is something very seriously wrong with Euro bonds, so investors move out of them. But today, they did not move into US bonds during this sell-off. This could be the start of serious trouble in the bond markets.
We are hearing of plans to force a ‘banking holiday’ in Europe as they are now worried there will be runs on the banks. This is getting ugly.
Our new trade is a long-term play on our theme that central banks have been artificially keeping interest rates down with all of their stimulus programs and bond purchases. It is like they have been trying to push a beach ball further and further under water. At some point they will lose control of the beach ball and it will shoot up. It looks like this is now starting to happen in the bond market.
It really is starting to look like the markets are losing confidence in government and if they abandon government bonds, watch out! We believe this new trade will eventually be a monster gain.
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Stay tuned!