Volatility has really picked up in the interest-rate market! I mentioned in last week’s edition of Ahead of the Curve, U.S. 30-year Treasury bonds hit an all-time low. Since then we managed to make another new low before spiking higher ahead of the European Central Bank (ECB) policy decision and statement of last Thursday.
Last week on Wednesday, long-term bonds made a new all-time low below 2.36% before climbing and ending the day at 2.47%. Overnight Wednesday and into Thursday morning ahead of the ECB announcement, the long bond yield climbed to 2.54%!
That is more than a 4% move overnight! Traders must have been looking for another disappointment from the ECB.
As of last Friday morning, the results of the ECB decision sent global yields sharply lower. Many European yields tumbled to record lows. The euro is at the lowest level in eleven years. European stocks have benefited from the ECB action as stocks in the U.S. did during the Fed easing.
Even though fundamentals in Europe remain questionable, traders are seeking higher returns in risk assets by buying stocks. U.S. stocks initially benefited from easing but have since pulled back, maybe because of a stronger dollar. U.S. Treasury bonds moved back toward record lows along with the rest of the globe.
In any case, it’s very apparent that central banks around the globe are manipulating the world financial system. As Harry Dent has mentioned on many occasions, this will end badly for those holding the bag when the central banks realize their efforts have been in vain and they stop their QE programs. Deflationary pressures prompted central banks to initiate these quantitative easing programs.
I was discussing all of this with Rodney Johnson this morning and we both agree that the ECB effort seems to be a last ditch effort to create inflation and goose their economy in the face of demographic and deflationary pressures.
When they figure out the program is ineffective (or when they are pressured to terminate their efforts), how will markets react? When that happens, look out! The bubbles will finally burst and then markets will eventually normalize. Assets will be priced fairly instead of traders trying to “front-run” the asset purchases by central banks.
The stock market has benefited from world-wide central bank tinkering and those who invested profited over the past six years but it’s time to be cautious. Harry Dent mentioned last week that we could see new highs in the markets in the short term but look out below!
We could see a major down-turn as early as March of this year. I agree with Harry, there are so many hazards that could trigger a major sell-off and as inflated as this bubble has become, common sense should tell you it’s time to start taking profits off the table.
If you have an interest in profiting from the rollercoaster interest-rate market, please take a look at the Dent Digest Trader. I’ll show you how to make healthy profits by trading options that capitalize on relatively small moves in interest rates on U.S. Treasury bonds.