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Donald Trump: No Clue About the Bond Bear Market

Updated on January 11, 2018

Bill Gross, the bond guru, should not be overstated. However, he has a tendency of yapping too much about the bond market and needless to say his predictions have mostly been wrong. He reiterated that the bond market entered a bear market a few years ago, but unfortunately his prediction didn’t materialize. This time though, he may have something to say, and that we are indeed in a bear market.

Gross stated, “Bond bear market confirmed today. 25 years long-term trendlines broken in 5 (year) and 10 (year) maturity Treasuries.” Indeed, the benchmark 10-year US Treasury yield did increase to their highest point since March on Tuesday January 9 as they surpassed 2.55 percent due to the ongoing bond sell-off.

It was reported that China has considered the option of completely ceasing or slowing down its purchases of US Treasury bonds. However, China’s foreign exchange regulator quickly refuted this statement by indicating the report was based on unreliable information and is “fake.” The means China isn’t willing to forgo their banker status for the common American. After all, data from the Treasury Department indicates that China is still by far the largest holder of US government debt. China holds a value of $1.19 trillion in US Treasuries and its foreign exchange reserves increased from $20.2 billion to $3.14 trillion over the past year. This comes amidst tapered regulations and a strong Chinese Yuan that continually inhibits capital outflows.

So I guess China wasn’t looking at Japan after the Bank of Japan showed signals of decreasing its long-dated bond purchases. Therefore, China must have not been thinking about the scaling back of stimulus programs by the European Central Bank and US Federal Reserve. Another bond guru bigger than Bill Gross, Jeff Gundlach, provided the same sentiment and indicated that a bond bear market will begin once the 10-year yield increases above 2.63%.

In response, China played their typical behavior of influencing markets by stating that they will continue to buy US Treasuries. Remember, China doesn’t want a currency war even though their currency continues to develop steam in becoming significantly dominant in regions that many Americans failed to anticipate. After China’s announcement, the US dollar instantaneously increased while yields retreated off their posted highs.

The bear bond market has to do with the survival of the fittest. Central Banks are pulling back which solicited other countries to follow suit. When there’s more supply the market undoubtedly shifts and the reason why is because countries are no longer satisfied with the current yields these bonds pay out. It’s a calculated move whereby countries are looking for higher beneficial yield and therefore respectively decrease bond-buying to once again prop up returns. Remember, every country in the world once demanded US debt and of course countries were lining up to get it.

Japan and Europe both have targets of zero-yield bonds and therefore seek higher yields from foreign bonds such as the USA and Canada to finance their government spending and infrastructure programs. Under Trump, the government will collect $1.3 trillion less in revenue from last year. So how much longer do you think these foreign countries will continue to have low yields? The survival of the fittest determines that eventually China will want higher yields with respect to their investments, just like Japan is cutting back their bond purchasing.

Bond yields are meant to closely track inflation. When there’s a bust in the bond market then it’s only a matter of time before the hungry masses that plowed all their money into the stock market to chase higher yields find out that their hopes are being eroded as yields plummet and the self-realization of corporate buybacks comes around to haunt executives that failed to create sustainable growth for their companies. This time, Bill Gross and Gundlach may find out that their conventional wisdom may be sustained rather than China’s manipulative growth data.

Miscreant Donald Trump indicated he could offset the national debt with the stock market gains. Is this guy talking about the financial institutions? Or the individuals who want to part with their gains? What private financial markets is he talking about that are helping pay off the national debt? I can see why he likes to eat those hamburgers and watch TV and CNN all day.

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