Boofing Bonds

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Good morning, everyone, and greetings from the dark and quiet suburb of Palo Alto, California. My dogs are all curled near my fight, all too familiar with my morning routine and awaiting their walk. So let’s get to it. The charts, that is, not the walk.

As most of you know, I’ve been kind of interest-rate-obsessed all year, and with good reason. We live on a globe absolutely choking on debt, and rising interest rates are probably the single most constrictive thing imaginable in such a scenario. It is therefore important to maintain not just an awareness of bonds, but an awareness of the broader trends as to just how big they might move. Looking at the /ZB this morning, we continue to inch toward the next important break point, tinted in cyan:


That is all part of a much bigger picture (I just realize while typing this I have tinted a section below in cyan as well; this is not the same as the one above, so I apologize). The longer-term picture shown below shows what the risk to bond bears used to be expressing as those green lines. There had been an inverted head and shoulders pattern forming, and it was trumpeted loudly by bond bulls, since a breakout above that yellow tinted area would have been quite bullish and crushed interest rates.

What happened instead was we slipped below the red line I’ve drawn and pushed down into a new range that we’ve been trading within for the past couple of weeks. Breaking beneath this range, then, is the next step, and even more important than that, sets us up for the prospect of bonds cutting below the “head” shown in the middle of the chart below.


What this would mean, of course, would be an acceleration of an already rising interest rate market. And although 99% of the public doesn’t know the first thing about bonds, and 99.9% of them couldn’t tell you what “/ZB” means, one thing most of them COULD tell you is what it feels like to open their mortgage statement each month and notice they have to write a bigger check to the bank. Money that they won’t have, but the bank will.

slopechart FR MORTGAGE US