Too often we fall into the trap of looking at treasuries only from the point of view of their expiration, but what we forget is that bonds are like family members. It doesn’t matter who is going into Junior High, High School, College or even Retirement… if you beat up one family member, you’ll likely find the entire family at your doorstep.
Why do I use this analogy? Often in our morning updates, I talk about what’s happening in the European, and Asian bond markets, and many people don’t see the correlation. Well the correlation is that bonds worldwide are linked because most US bonds are held by foreign entities or institutions and so what is happening in Japan and with Japanese Yields, will affect our bond market directly.
At the moment the Bank of Japan is artificially depressing bond yields to avoid them spiking, and this has caused the Japanese Yen (and the Chinese Yuan) to fall dramatically against the dollar. This means it’s completely unattractive for foreign institutions to invest in US Bonds because the minute the currency market regulates, the value to Asian nationals will be useless.
So if the Asian markets aren’t interested in investing in US Bonds what about Europe? Until this month the European Central Bank has still been in an easing cycle, and recession is already upon them. However, Europe has a more unique problem which is that the individual EU countries have completely unique economies and some countries with extremely high debt like Italy, Spain, and Greece cannot cope with higher rates because it would make it impossible to satisfy their debt repayments.
So now that the US Fed are tightening, and therefore NOT refinancing the treasuries they hold, the question is who will pick up the tab? The banks that created these treasuries need to find others to pick up the tab, and it’s still unclear week in and out, who is stepping in to fill this gap.
Is this important to the average American? Certainly…
If companies can not borrow money easily, to refinance their own debts, it means they’ll start tightening their belts, minimizing research and reducing high-cost ventures, they’ll start cutting staff and limiting company benefits…
If companies can not aggressively participate in stock buyback schemes it means their stock valuations are affected much more directly by outside market moves.
Mortgage rates will increase if the Fed is not picking up more mortgage back securities.
On the flip side, housing prices and stock values will drop which for the savvy investor would be the opportunity of a lifetime.
If you want to make sure you’re positioned to take advantage of these lows, than join us at Trade Speakeasy. It’s what we do and what we teach you how to do.