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Is the US Treasury Bond Market Turning?

Perhaps the biggest macroeconomic event to watch for is the potential that the US Treasury bond market is turning south -- and that bond yields will rise significantly. This has many implications for the global economy, as capital flowing out of the US Treasury bond market -- the largest non-currency financial market -- will drastically impact values in other markets.

First, let's look at price. Below is a weekly chart of the TLT, an ETF tracking 20+ year US Treasury bonds. Note that price has been in a declining pattern for the past year.

TLT Weekly Chart
Larger Image

In terms of fundamentals, many people believe a mass exodus out of Treasury bonds is likely to occur at some point -- however timing is the big issue. Concerns about the US Treasury bond have existed for quite some time, given that US debt/GDP has surpassed 100%, and that debt is still growing as the US continues to run a budget deficit. Michael Pento's book, The Coming Bond Market Collapse, elaborates on this thesis. That this idea has been discussed for years while bonds have rallied, though, has turned many off to the idea that a sustained run out of the bond market is imminent.

But if the trend does continue and US treasury bonds end up giving up their gains since April of 2011 and more, what might happen in other markets? Where might capital flow? I believe precious metals would be the biggest beneficiaries, with commodities being the second biggest. Certain stock sectors could do well -- perhaps consumer staples? -- though I'd be wary of stocks, as they have been rallying strong since the start of the year in most equities markets around the world, and since an increase in interest rates would reduce credit available for buying stocks on margin. I would expect the decline in availability of credit to decrease the value of most real estate as well.

What do you think of the US Treasury bond market, fundamentally and technically?

 

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