Reading The Bond Market.

US Treasury Bonds have dramatic drop in yield.

The US Financial Markets are the largest, most robust markets in the world.

They currently stand at around $75 Trillion Dollars when you add them all up. They're a little lighter lately. Because of the actions of the financial markets junior member: Stocks.

If you've been watching the financial news lately, it's all about stocks. And that's usually how it is. Stocks, after all, are the volatile ones. The center of most of the speculation in finance. The place where such modern “innovations” (you should pardon the expression) as high-frequency trading and other speculations occur.

When you think of a “crash” you inevitably think of stocks.

But there is another, much larger part of the financial markets. And that is the bond markets. You may be interested to know that at last measure the US Bond Market stood at just under $43 Trillion Dollars, nearly 50% larger than the stock market.

And unlike the stock market, this number is likely understated. You see bonds are rallying right now. And the price of the bonds is hitting all-time highs.

Anyone in the bond market currently is quite happy. And like the stock market, the bonds also have a tale to tell. In fact, it may be the same message, but from a different perspective.

If we are reading stocks correctly they are indicating that their future earnings are likely to be reduced. And that the multiple expansion that they have been experiencing lately are over-blown.

In other words, the economy is weak, and corporations are not going to return the results that were expected just a few weeks ago.

Certainly the Covid-19 is a contributor to this, but there may be other factors.

The bond market comes to exactly the same conclusion, but as noted from an entirely different point of view.

Bonds also, see the economy as very weak. But they focus principally on the cost of money or the interest rate. Bond's say: that the demand for money is going way down. And therefore interest rates need to be much lower.

The result for the most visible bond of all, the US 10 year Treasury, is that its interest rate has been lowered to a new all-time low. Approaching 1%. And it's a better than even bet that it will drop below 1% shortly.

This is astonishing.It has also put the Federal Reserve in a difficult position.

You see, the Fed gets together 10 times a year, and sets the short term rate. There next meeting will be in just a couple of weeks, on the 17 and 18th.

Now, the Fed tells us that interest rates begin at 1 3/4%. That's the short term rate, that they set at their last meeting. And because that's the rate of all short term loans, all the rest of the bond market ought to trade at a higher rate.

They don't.Every single bond, going out 30 years, is trading right now with a current yield below the Fed's rate. In fact, that 10-year bond we're talking about yields 40% less than the short term rate.

Somebody's got this all wrong. And my assessment is that it's the Fed which is out of whack.

The Fed has completely lost, the largest most important of the financial markets. And if they don't catch up with the bonds, they're going to make a bad situation even worse.

You see, when you have short rates higher than long rates, you are essentially putting the brakes on the economy. You're saying to investors put your money in short term investments. And this dampens long term lending. Thus taking away those funds corporations and agencies need for long-range expansion.

That's just the opposite monetary policy that we need right now.What's needed now, is for the Fed to loosen monetary policy. And they can do that by lowering interest rates at their coming meeting.

But not by a ¼ or 1/2%. They need to lower to the level that bonds are indicating.

In other words, the Fed needs to lower rates to the 10 year bond rate, 1%. That's 75 basis points below where we are now.

Yes that's draconian.Yes, it's much lower that I'm comfortable with.

But if there's one thing we know, it's that the bonds are calling this market.

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