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ECONOMY & MARKETS | January 13, 2017
Is the Bond Rout Over?
By Lance Gaitan, Editor, Treasury Profits Accelerator
While the Trump-fueled rally continues, the Fed’s been keeping a relatively low profile lately.
Maybe it’s the New Year or maybe it’s just analyzing the incoming data to determine whether last meeting’s hike did the trick. Or maybe it just doesn’t want to rock the boat ahead of the president-elect’s inauguration since the Fed’s not all that popular with him. In any case, since its last meeting and rate hike in December, the Fed and Janet Yellen have been pretty quiet.
Don’t get me wrong, Fed officials are still making scheduled speeches. In fact, just this past week, there were nine of them! It’s just that they seem to be extra guarded.
Perhaps Yellen and her colleagues know they’re mostly powerless when it comes to regime change at the Fed. Waiting is their only play for the time being. Whether they sit on their hands or not, there are movements to keep track of, because those fluctuations can mean big profits.
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Not only did the president-elect launch attacks on the Fed and Janet Yellen specifically during his campaign, but earlier this month, Senator Rand Paul (along with eight co-sponsors) reintroduced his Federal Reserve Transparency Act. The legislation is widely known as the “Audit the Fed” bill aimed at preventing the Fed from concealing vital information on its operations from Congress. Fed Chair Yellen believes the Fed will lose independence (and perhaps some power) with passage of the bill.
During the Q&A session after the last Fed meeting in December, Yellen was careful to steer clear of judging the economy based on the recent election result. She did say that she is “a strong believer in the independence of the Fed.” She also mentioned that current regulation to prevent financial crisis has been working and urged the incoming administration to keep it in place.
It’s way too early to tell how the incoming Trump administration will change regulation, the Fed, or even taxes – but interest rates were on the move before the election.
Since early September when my system generated a trend change signal, long-term interest rates have been heading higher. The surprise result of the U.S. presidential election helped fuel an even sharper rise in yields along with a sure-bet hike in short-term rates by the Fed.
Remember, when interest rates or yields rise, bond prices go down! So, is the bond rout over?
Overall, it was a nice ride while rates rose over the last four months! Treasury Profits Accelerator members had a chance to bank profits of over 147% during that time! Take a peek at the chart below:
See larger image
The overall economy improved slightly, but didn’t really justify the sharp move higher in rates – and especially the move to new record highs in stocks. Interest rates are starting to price in risk even though stocks are still trying to push higher.
2017 does have a few strong indicators. Housing’s been a bright spot in the low interest rate environment. Consumer spending ticked up recently along with inflation. Job creation has been strong, but the quality of jobs and participation hasn’t been. Wages are creeping higher with a low unemployment rate, pushing inflation closer to the Fed’s 2% target. Nothing to sneeze at.
But it’s not all smooth sailing. Businesses haven’t been investing, corporate profits are still weak, our manufacturing sector barely has a pulse, and the broadest measure of the economy, gross domestic production (GDP), has been anemic.
Trump’s promises of government stimulus and less regulation have pushed stocks to new highs and initially pushed rates higher, but these are only surface-level victories. Without the demographics to support real economic growth, reality will finally set in – and when it does, watch out.
The jobs report was a slight disappointment with new non-farm jobs increasing by 20,000 less than expected. Wages increased a bit more than expected but bounced 0.4% from a very weak 0.1% last month.
The Fed promised three rate hikes this year, but we’re not holding our breath. Remember, they promised four last year at this time and came through just once – in December! Harry’s forecast foresees more pain for bonds down the road. But I’m looking at the short term and, at least for now, the rout is over.
Volatility is higher and that’s great for us because that means more opportunities to profit with my strategy. Regardless of where rates go, as long as there are surprises, we should have a very good year!
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