The bond market sent a strong statement today about their confidence in both the stock market rally and their fears around inflation.
As you can see below, we had a 4 week treasury auction today that saw a very strong BTC(bid to cover) of 4.7:
Note that the participation in this auction from the indirect bidders(Foreign Central Banks) was over 61% which is a very healthy number. This was an A+ auction in anyone's book.
The problem here folks is it's a 4 week auction with an interest rate of .04%! There is basically ZERO risk if you decided to participate in this auction.
My querstion here is if there was a lot of confidence in the recent stock rally then why would be see such a strong flight(nearly $5 bid for every one dollar accpeted!) into short term bonds that pay virtually nothing?!!!!
Can you say Capital Preservation?
Now let's take a look at the 3 year treasury auction from today:
As you can see above, the BTC was an underwhelming 2.76 and the indirect interest fell below 50%.
Personally I am not impressed.
The Bottom Line
So what is the bond market telling us? It says short term treasuries are safe.
However, over the long term, the lack of interest in the 3 year auction tells you that the bond market has no interest in holding a 3 year bond with an average interest rate of 1.44%.
To me this signals that the bond market is worried about both inflation and the potential of a breakdown in the US dollar. Why wouldn't they be after seeing gold rising above $1040 an ounce today?
The FEAR of inflation and a dollar collapse is why the bond market is acting this way. Keep in mind that there are still tremendous deflationary forces on the economy via the consumer. The Fed is fighting this deflation by throwing trillions of dollars at it?
So who wins? IMO this is still anyone's guess. However, I continue to be attracted to metals in this scenario because I am beginning to believe that the world is losing confidence in the US and their ability to control their deficits and spending.
If they lose confidence in our ability to pay back our debts, then the dollar will eventually breakdown.
As a result, the world now feels they must diversify out of the dollar and into things like commodities and precious metals.
Bond Auction Alert!
We have a huge 10 year auction tomorrow at 1:00 that will be fascinating to watch given today's action in the bond pits. If the world bails on the 10 year auction tomorrow, you could see bonds sell off severely.
I expect a volatile day tomorrow. Hang on tight boys and girls!