Will US Treasury yields go negative?
With $10 Trillion (and growing) of sovereign debt in negative yield, can the UK and USA be far behind? That is the big question on bond traders’ minds. With the hunt for yield getting more and more frantic, formerly high-risk junk bonds that were shunned a few weeks ago are being eagerly lapped up.
Here is the daily chart of the US Junk Bond Index HYG showing the sharp decline in yields (higher prices): 
The February low coincided with the low in crude oil at $26 when the high yield bonds of US shale frackers came under severe pressure. But with the recovery in crude, the bonds seem no longer in danger – and with yields of 8% or so, they have been greedily devoured by yield-seekers.
Here is the daily chart of the 30-yr T-Bond which shows yields are falling along with the high yield junk yields. So is this bond rally assured – and are negative rates inevitable with T-Bond prices shooting for the moon?
chart courtesy www.elliottwave.com
Not if you believe the current sentiment picture- at least not yet. According to the DSI index, now 96% of traders are fully bullish on prices (lower yields). In other words, only 4% of traders are bearish here. In other words, there are now 24 bulls for every bear. That long trade appears a little crowded, don’t you think?
Note that every time the DSI has reached these extreme heights, that marked a top (at least temporarily), and enough downside for a very decent profit to be made on short sales. But as I mentioned last time, timing is (almost) everything.
I have shown sentiment extremes many times over the past few years that when sentiment gets this extreme, we should look to go the other way.
Maybe in time, US and UK rates can go negative, but very likely not in a straight line from here
But what are the implications if this happens?
Depositors will not want to pay banks to hold their money, so the ‘obvious’ conclusion is that consumers will withdraw it and spend it and do the job of the central banks to boost the economy. But hold on; US consumers are falling out of love with spending – and have been for years. Here is a revealing chart:
The trend towards saving and away from spending is clear, so the economy might not get that boost after all.
No, I believe the impulse would be for consumers to salt the money away for the rainy day they feel is just around the corner. That is why governments are thinking of ways to eliminate cash notes from the economy – and why Bitcoin is in a strong bull run
The thrust out of the 5-wave wedge is violent – and is showing that fears over the existence paper currency is growing. This is a chart that every central banker should want banned!
In Denmark, banks are already offering negative rate mortgages in this Alice in Wonderland scenario. Yes, they will pay you to take out a loan with them. Banks do not want your money (not yet, anyway) as they are penalised by their central bank for making deposits.
This is the New Normal, folks.
For commercial interests, negative rates are a godsend because they can borrow at even lower rates and keep buying their own shares, keeping director bonuses buoyant.
For pension funds and the like that must buy whatever government bond is offered, they will be penalised by negative rates and I am not certain what they will do, other than continue diversifying into real estate and shares to continue blowing up these bubbles.
The bottom line? The Bond Bubble may be on borrowed time, at least for a while, and equities should continue to be supported. My forecast for new highs in the Dow and S&P remain on track with the latter only less than 1% from making an all-time high above the 2136 top last year.
Next week, the Fed will announce its decision (or not) on rates. The jobs figure shocker last week must have sent shivers down Janet’s spine, but she seems to have put a brave face on it in yesterday’s speech. Markets will be nervous ahead of next Wednesday’s Fed ‘news’.
