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Bonds & Interest Rates

SIGNS OF THE TIMES

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Posted by Bob Hoye - Institutional Advisors

on Wednesday, 08 February 2012 13:17

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The following is part of Pivotal Events that was

published for our subscribers February 2, 2012.

SIGNS OF THE TIMES:

"Take Federal bailout money, watch your company's stock fall 90%, become a Co-Chair of Davos"

– Bloomberg, January 20

The headline was referring to Citigroup CEO Vikram Pandit.

"Junk-bond trading volumes are rebounding to the highest levels in 11 months – optimism."

– Bloomberg, January 27

"Societe General SA and Credit Agricole SA were among French banks to have their credit grades cut by Standard & Poors."

– Bloomberg, January 24

"The IMF cut its forecast for the global economy as Europe slips into recession."

– Bloomberg, January 24

*   *   *   *   *

STOCK MARKETS

The best January for the stock markets in years has restored their popularity. Bullish comments include low P/Es and attractive dividend yields as well as favourable comparisons to bond yields. Not to overlook outstanding earnings gains.

In our dispassionate approach this is considerably different to conditions in early October. Choppy action, but rising until around January was possible and couple of weeks ago we thought it could continue into February.

The February 24th ChartWorks "Complacency Abounds Oh-Oh!" outlined the probability of a top within the next four weeks.

The surge out of mid-December has been exciting enough to register some cautionary alerts and last week we were looking for some "key" technical excesses. The S&P has since reached 73.3 on the daily RSI and this compares to 70 reached with the high of 1370 at the end of April. That was on the speculative surge that out proprietary Forecaster expected to complete in that fateful April.

Stock markets are poised to roll over. If so, the latest rally is a test of the April high which we considered the cyclical best of the first bull market out of the crash.

Credit Markets

The demand for risk continues with favourable action in corporate and municipal bond markets. Yields for the Italian ten-year keep going lower and after registering scary headlines last week even the Portuguese bonds are declining in yield.

Sub-prime mortgage bonds have rallied in price from 38 in October to 51.6 – that's up a little more than half a point from last week.

Money market stuff such as the Ted-Spread started to narrow at the end of December.

To Ross's "Complacency Abounds" in stock market volatility we would add that it is abounding in the credit markets as well.

Fortunately, we may have an exit indicator.

The action in municipals (MUB) has been good enough to register an Upside Exhaustion. The price could roll over within a couple of weeks and the change could be part of a general reversal in risk products. This will likely show up in the reversal in the stock market VIX.

Long-dated treasuries are working on a big top. Within this the final rally has been likely to occur as the excitement in stocks and commodities fades.

This has taken the bond future from the 140 level to the 145 level. The high was 146 in December.

Currencies

Ross targeted the decline in the US dollar index to around 78.8 and so far it has bounced off this level a number of times. With this, the Canadian made it up to 103 (briefly). It is now vulnerable to a decline in commodities.

 

 

Link to  February 3, 2012 ‘Bob and Phil Show’ on TalkDigitalNetwork.com:

http://talkdigitalnetwork.com/2012/02/jobs-boom-stocks-pop/

 

 BOB HOYE,   INSTITUTIONAL ADVISORS

E-MAIL  bhoye.institutionaladvisors@telus.net">bhoye.institutionaladvisors@telus.net



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Bonds & Interest Rates

The 2008 Financial Crisis Was Nothing Compared To What Lies Ahead

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Posted by Michael Snyder

on Tuesday, 07 February 2012 09:31

The people out there that believe that the U.S. economy is experiencing a permanent recovery and that very bright days are ahead for us should have their heads examined.  Unfortunately, what we are going through right now is simply just a period of “hopetimism” between two financial crashes.  Things may seem relatively stable right now, but it won’t last long.  The truth is that the financial crisis of 2008 was just a warm up act for the economic horror show that is coming.  Nothing really got fixed after the crash of 2008.  We are living in the biggest debt bubble in the history of the world, and it has gotten even bigger since then.  The “too big to fail” banks are larger now than they have ever been.  Americans continue to run up credit card balances like there is no tomorrow.  Tens of thousands of manufacturing facilities and millions of jobs continue to leave the country.  We continue to consume far more than we produce and we continue to become poorer as a nation.  None of the problems that caused the crisis of 2008 have been solved and we are even weaker financially than we were back then.  So why in the world are so many people so optimistic about the economy right now? The Next Next Financial Crisis Will Be Devastating To The Economy

 

Just take a look at the chart posted below.  It shows the growth of total debt in the United States.  During the financial crisis of 2008 there was a little “hiccup”, but the truth is that not much deleveraging really took place at all.  And since the recession “ended”, total credit market debt has gone on to even greater heights….

Total-Credit-Market-Debt-Owed-440x264



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Bonds & Interest Rates

Keeping Rates Low Until 2014?

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Posted by Martin Armtrong - Armstrong Economics

on Thursday, 26 January 2012 16:27

Screen shot 2012-01-26 at 3.31.41 PM

While the first reaction is for gold to rally and the pundits to come screaming out of the weeks yealling it's inflationary, the harsh reality of this statement is....



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Bonds & Interest Rates

DANGER AHEAD FOR U.S. GOVT: Unable To Service Debt As Interest Rates Surge

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Posted by Steve St. Angelo - SRSRocco Reportt

on Monday, 29 November 1999 17:00

The U.S. Government is in serious trouble when interest rates rise.  As interest rates rise, so will the amount of money the U.S. Government will have to pay out to service its rapidly rising debt.  Unfortunately, interest rates don’t have to increase all that much for the government’s interest expense to double.

According to the TreasuryDirect.gov website, which came back online after being down for nearly a month, reported that the average interest rate paid on U.S. Treasury Securities increased from 2.2% in November 2016 to 2.3% in December 2017.  While this does not seem like a significant change, every increase of 0.1% in the average interest rate, the U.S. Government has to pay an additional $20.5 billion in interest expense (based on the $20.5 trillion in total U.S. debt).

Already, the U.S. Government is off to a BANG as it’s interest expense paid for the first three months of the year increased to $147 billion compared to $139 billion in the same period last year:

US-Oct-DEC-2015-2017-Interest-Expense

This chart was taken directly from the TreasuryDirect.gov site, with my added annotations.  As we can see, the U.S. Government paid $126.5 billion to service their debt Oct-Dec 2015.  We must remember, the U.S. Government Fiscal period starts in October.  So, in just two years, the interest expense the U.S. Government paid for Oct-Dec increased more than $20 billion.  Now, what is interesting is that the average interest rate in Dec 2015 was 2.33%, but in Dec 2017 it was only 2.31%.  Thus, it was actually lower, even though the interest expense increased by $20 billion.

The reason for the $20 billion increase in the interest expense during Oct-Dec 2017 versus Oct-Dec 2015 was due to a more than $2 trillion increase in U.S. debt over that two-year period.  So, the U.S. Government will have a serious problem as interest rates really start to rise… and that doesn’t even include the continued increase in total U.S. debt.

This next chart shows the increase in U.S. debt, while the average interest rate fell from an average 6.6% in 2000 to a low of 2.2% in 2016:



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