Bond Panic!!!!

Good Evening Folks

If you only looked at the stock market today you would think that everything was just Hunky Dory out there. Ahh...Not so fast my friends. Bonds collapsed once again today and sold off hard into the close. The 10 year futures are now trading at a 3.55%!

The move in TNX today was PARABOLIC:

My Take:

Basically all hell is breaking loose in the bond market. Here is the problem boys and girls: The bond auctions went well today because they were 2 year auctions meaning that the bonds were on the short end of the curve. This is where everyone wants to be because they mature quickly. This quick ROI makes them one of the safest places to be in the treasury market. As a result, the auctions went well.

Where investors don't want to be is stuck in the long end holding 30 year bonds! The rest of the auctions this week are 5 and 7 year treasuries. There will be not be as much demand for these bonds because they begin to lean closer the longer end of the yield curve in the treasury market. Across the curve is suggesting tonight that a long tail on the 5 or 7 year bond auctions later this week could mark the beginning of the end for treasuries.

The fact that the our bailout obsessed president just dumped another $30 billion into GM wasn't exactly soothing for the bond market. The Fed must be in a panic after seeing what happened in the credit markets today.

Bottom Line

The gates of hell could open wide if the 5 and 7 year auctions don't sell well. The panic sell off in treasuries late today should be considered to be extremely ominous.

This rally today was based on consumer sentiment which came in way above expectations. Hell, even I was impressed. However, remember, sentiment is just sentiment. Sentiment doesn't buy a car or a house. It just means people are feeling more optimistic.

Meanwhile, back here on earth, our economy continues to collapse. The March Case/shiller report was a pefect example of this:

"May 26 (Bloomberg) -- Home prices in 20 major metropolitan areas fell more than forecast in March as foreclosures surged, threatening to extend the housing slump.

The S&P/Case-Shiller home-price index decreased 18.7 percent from March 2008, matching the drop in the year ended in February. The measure declined 19 percent in January, the most since data began in 2001.

Record foreclosures are depressing the value of other properties, contributing to a slump in household wealth that is hurting consumer spending and the economy. Still, falling prices and mortgage rates have made homes more affordable, helping to stem the slide in sales, which will eventually help prices stabilize.

“The housing market still has somewhat of a ways to go before it completely bottoms,” Celia Chen, an economist at Moody’s Economy.com in West Chester, Pennsylvania, said in an interview on Bloomberg Television. “Prices I think still will fall a little bit further.”

Bottom Line Continued

I thought housing was stabilizing? BB told us that the they were seeing signs of stabilization in the economy dammit! Gee, do you think perhaps he lied?

As you can see there are no signs of stabilization. The only sign I see here is one that reads: FREEFALL! Housing prices were down almost 19% down versus March of last year. Yuck.

Remember folks, the economic crisis cannot end until housing stabilizes. Most of the bad assets on the banks books are bloated McMansion mortgages. Dropping housing prices mean only one thing to the banks: MORE LOSSES!

What can I say folks? We are spending too much money that we don't have, and this house of cards is about to come tumbling down. The credit markets are trying to warn you that its coming. We have moved from 2.4% up to over 3.5% on the 10 year in less than 2 months. Whats amazing is this is happening at a time when the Fed buying treasuries via QE! This is a parabolic move that may be signalling that a bond dislocation could be right around the corner.

The equity market told you the wrong story today folks. Moves in equities based on consumer sentiment telling you "happy days are here again" are moves that I ignore.

The real story happened in Chicago. I am amazed at how these pump monkeys can take the market higher in the face of such bad news.

I mean its amazing: GM is bleeding money and going BK, the bond market went berserk going into the close over concerns around our credit rating, and housing once again dropped to all time lows.

So what do stocks do in response to all of this? Move higher because consumer sentiment came in above expectations! These poor saps buying stocks have no clue that they are jumping into a pit filled with rattlesnakes.

Stay Tuned!