Treasuries Sold After FOMC Minute Statement

Not only was Gold sold violently, more violently than commodities by the way, but U.S. Treasury bonds were also sold as the market obviously believes that the U.S. economy is healthy enough to allow rates to rise.  So, everything appears normal on the surface.  Stocks were sold initially but recovered to end the day with modest losses while energy commodities were off similarly or flat.  The U.S. Dollar strengthened on the lack of any new round of quantitative easing.  30 Year bond yields closed at 3.41% blasting back through their 200 day MA.  A break of 136 on the bond futures price of 3.5% on the yield should signal a new phase in this scenario.  The Fed will do everything to maintain the current uneasy truce.  The TIPS yield curve widened considerably today on the latest FOMC statement as well.

the problem for the Fed, is, of course, that if the economy is truly expanding and everything has been fixed then inflation is right around the corner which also means that Gold cannot be maintained at these levels and the massive reserves being held by the zombie banks will begin circulating.  Once the selling in the bond market begins to any appreciable amount because of this idea of a new economic boom having been forged through four years of financial repression it also means that any selling that occurs from foreign holders of U.S. Treasuries the Fed will have to absorb at an even faster rate than it already is.

The expanding economy argument will also embolden the politicians in Washington to continue their profligate spending habits putting further pressure on the Fed to monetize any new debt issuance to cover the budget shortfall.

It will not take much from there for a small player to tip the balance on the dollar.

If everything is so normal and fixed again, why did the Fed purchase 61% of all the bonds issued by the U.S. Treasury in 2011?  Are they prepared to buy China’s as well?

 

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Tom Luongo

About Tom Luongo

Tom Luongo is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.

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