The Big Event of 2018: “Safe” Government Bonds Break Down

The chart on your left and the viewpoint expressed in this issue that 2018 will be a big down year for U.S. sovereign debt as well as that of two major allies, Germany and Japan, is the view that Michael Oliver sent to his subscribers last week. (Go to www.OliverMSA.com to learn more about his excellent work.) Here is what Michael said on Dec. 8, 2017:

“U.S., German, and Japanese government bonds are set for a major decline. Given the proximity of the momentum structural downside trigger numbers, the age of the prior trend, and the significant trend infractions that have already occurred, MSA argues that 2018 will be the beginning of a large decline in bond prices, with a wave-making rise in rates that will affect other asset categories. 

“MSA realizes that many thoughtful analysts have already defined these markets as bubbles—fantasyland distortions of reality beyond anything they could have imagined before—with the German and Japanese long yields having been driven (by non-market forces) to sub-zero yields. However, MSA’s work is focused solely on the timing of those trend changes. These markets have been bubbles for several years. An unreal situation, but sometimes an unreal situation must ripen to extremes before it bursts. Our work tells us that will likely be soon and, sudden.”

On Dec. 9 Michael sent out the chart on your left with the following explanation:

“The oldest debt futures traded in the U.S. MSA issued a major sell signal in October 2016 as the two-year uptrend line broke on annual momentum. Price was then 166 (it’s now wallowing around in the low 150s). We expect the next major down leg to occur when the massive and flat red-lined structure comes out on momentum. That set of lows has continued to hold at six to seven points below the 3-yr. avg. (which of course adjusts upward each year). So while price shows no such clear structure, momentum does. Next year the 3-yr. avg./zero line is projected to rise from its current 151.12 to an estimated 155.68. Translated to momentum structural breakage, that means if the front month T-Bond future closes any month next year at 148.18 (148 & 6/32ds), this structure is gone. At that point, expect the next major leg of the bear market to begin. MSA is closely watching all three of these major developed economy government debt instruments. (Germany, Japan & the U.S.) We want consensus and expect to see it occur fairly tightly. By the way, that trigger for T-Bonds is about one full point above the 2017 traded low, which was just above 147. Note the market’s wimpy tone this year after its initial sharp drop (caused by breaking the uptrend structure on momentum). While rattling in the stock market might lend some temporary support to T-Bonds in the next month or so, the expectation of a “flight to safety” to hold these markets upright is untenable.”

So let’s think about this for a minute. If the U.S. T-Bond tanks for a lack of buyers, the Fed will have to allow rates to rise to attract dollars to fund massive and surging U.S. debt, now over $20 trillion! But if rates rise, Trump’s economy gets hit hard during 2018, a Congressional election year. The new Fed Chairman is said to favor lower rates, even negative rates if necessary. Can you think of a better scenario for gold at a time when the ratio of the price of gold to the U.S. Monetary base is at an all time low? I can’t.

About Jay Taylor