Bonds, Interest rates, and Mortgage Applications ...
Pimco's Bill Gross made the News headlines today, when he said that: "The Federal Reserve is unlikely to change monetary policy for years as the economy remains mired in an extended period of slow growth". "But it's not an endorsement of Treasurys. For months now they have been more of an insurance policy than an investment."
What is Gross suggesting?
He is suggesting that the economy isn't going to recover anytime soon ... possible years. He's not he only one to think we are going to see a really tough economy for a some time. There are some strong vocal opinions that think the economy won't even hit bottom until 2013 to 2015. If this turns out to be true, then Bill Gross will be correct ... even though it means Americans will have to go through more pain.
How can you tell if Gross is correct by looking at charts?
A good way to do that, is by looking at what is happening to the 30 Year Bond Yields (interest rates). As it turns out, a Point & Figure chart of the (TYX) 30 Year Bond Yields gives a very clear picture of the CRITICAL juncture we have come to.
In fact, for months, we have been saying this about the upcoming juncture:
"A market decision point, or face-off is fast approaching. ***Do not under-estimate the importance of such an event. It will be a "game changer" that causes market pressure on the economy along with the necessary re-evaluation of future economic forecasts."
Take a quick moment to look at the 17 year chart below, and you will understand where we are now. This is a Point & Figure chart of 30 Year Bond Yields which also has a relationship to mortgage rates.
If you look at the upper red resistance line, you can see that the 30 Year Yields have descended for 15 years. That's a very long 15 year down trend that is now being challenged, because the resistance line has been slightly penetrated 3 times since 2009.
The market forces have been trying to push rates above line and put an end to the 15 year down trend. Why? Because investors want to be paid higher returns for the "higher risks" they are taking. At the same time, Bernanke has been using Federal Reserve Funds to buy down rates and keep them low. The housing market has not recovered yet, and accelerating mortgage rates would put a real hurt on a problem that is already in tough shape.
So now, look at the circled area on the chart below. That is where the interest rate fight is going on now. If the TYX rises above 45.9, there would be a real serious threat to the current 15 year down trend. Bernanke, home owners, and the economy all need Bill Gross to be right ... even then, it will be a hard road ahead until enough debt de-leveraging has been accomplished.
There is no "happy answer" as to which way investors should want interest rates to go. Both will create pain given the current international market conditions and problems. But as in all scenarios, there is always money to be made in different sectors, in going long, or going short. The worse kind of market is a sideways market, and I don't think you will be getting that anytime soon.
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