Treasury bonds are still low by historical standards, but the chart on your left shows a very dramatic rise since July 2016. Specifically, the 30-year T-Bond has risen from 2.13% in July to 3.19% as of Thursday, Dec. 15. We have passed along Michael Oliver’s views that we are in the early stages of a major bear market for U.S. Treasuries, although based on his work he thinks it is likely we will see a counter trend rally soon.

Like most of the news from our mainstream media these days, the news when it comes to interest rates is definitely “fake news”! The happy talk reason given for rising rates is that “the market” in looking forward sees infrastructure spending by a Trump presidency that will generate economic growth.  That is the cause of rising interest rates. But that does not always happen. In the 1970s there was plenty of stimuli that generated inflation but no growth. Because of inflation, rates rose dramatically as the Fed continued to print more and more money to try to keep interest rates down. But that policy only added gasoline on to the inflationary fire causing real rates to continue to decline, which lead to even more inflation. Real rates continued to decline until Volker stopped printing money in 1980. Real rates then rose dramatically, breaking the back of inflation and that started the 30+ year bull market in bonds that is only now coming to an end.  So the assumption that infrastructure stimuli will lead to economic growth, and thus rising rates, is not always true. Also we have seen rates fall during rising economic growth too.

U.S. interest rates have been falling over the past 35 years or so and huge profits have been made by holding Treasuries, as central banks around the world have been printing more and more money out of thin air, which was used by banks to buy up government Treasuries, sending rates lower. But alas, our monetary system is a debt-based system, meaning that money is manufactured with debt. As politicians and bankers indulged in reallocating wealth into their own pockets, they left behind a bankrupt world that is now on the precipice of a global financial depression the likes of which the world has never seen because never before in the history of the world has every nation been committing the sin of monetary theft with debt-based money to the extent that has occurred since Nixon took us off the gold standard in 1971. So much debt has been created in the process that debt has continued to grow much faster than income.

This past week Lee Adler, who provides excellent commentary along with David Stockman at David Stockman’s Contra Corner, points to the sickness of European banks as a main cause and with that illness their inability to buy U.S. Treasuries because they need the money to patch up their own accounts. Adler wrote,

“European banks are largely insolvent. The money that the ECB is pumping into their accounts has been a stopgap to keep them afloat. It has worked up to a point. But the crisis reached a flashpoint this fall. The banks and other borrowers in Europe then began to use the ECBs cash to pay down their own debts. Before, they would use the cash to buy sovereign debt, both of their own countries, but more often than not, of the US Treasury.  So for years, US Treasury prices kept rising, and yields kept falling.

“That reversed last summer when the banks started to need to raise cash. Instead of buying more Treasuries, they started to use their Treasury holdings as a ready source of cash with which they could pay down debt. When debts are paid down, deposits are extinguished. When deposits are extinguished there’s less money available to buy more debt.

“So the Treasury market has a double whammy. European banks are selling Treasuries to raise cash to pay down debt. When they pay down debt they use cash on deposits to pay for it. The money is thus extinguished, so there’s less of it available to buy Treasuries. Prices fall and yields rise. That pressures the market. Some traders get hit with margin calls. And so it goes, leading to a downward price spiral and mirroring rise in yields.”

Adler’s views are in sync with Michael Oliver’s view that we are likely to see a counter trend rally in T-Bonds. Quite smartly in my view, Lee thinks that a rise in the T-Bond should be viewed as perhaps the last opportunity to exit Treasuries. From his fundamental viewpoint, Adler agrees with Oliver who sees U.S. Treasuries as just now starting a long, painful bear market. That is so because it’s not a matter of just one country here and there that is going broke; the whole world is going broke, thanks to the Keynesian economic insanity that went rabid with Nixon in 1971. So even if they wanted to keep buying U.S. Treasuries, (and some like China clearly do not), they are not able to. In other words, the world’s dollar based financial system is breaking down! Adler continued as follows:

“And if bond yields resume their rise, which the technical charts suggest is only a matter of time, it won’t be because the “market” expects a stronger economy and more inflation.  It will be because there’s less money around. Europe has always been a huge buyer of Treasuries. Europe is now really broke. Even its brokers are broke. Broker than ever before. Deutshce Bank? Dead! Monti di Paschi? Dead! Spain’s banks? Dead? Bank deposits? Plunging. Banks holding deposits in other banks? Fleeing like rats from a sinking ship.

“It’s over for Europe. Finished. Kaput. Now, as Rome burns, the ECB has decided it’s time to cut back on its weekly cash drip to the Eurozone banking system. The process of central bank long term serial blunders just goes on and on. They’ve made a mess they can’t undo. Well, they could undo it, but their house of cards collapses on the process.

“So if bonds do rally here, take it as a gift. If you’re holding long term bonds that have big profits, use that next rally to skim the piggy bank. If you hold on to your long term paper, those profits will shrivel away. By the same token, short term bills are likely to increasingly reward you for being on the sidelines as the liquidity crisis deepens.”

Adler didn’t mention reduced purchases of U.S. Treasuries by China, but just as I was getting ready to go to press with this article, the following headline from Zero Hedge caught my eye, as it directly relates to the declining value of our U.S. Treasuries.