Home»Concerning the Financial Markets»The global interest rate lift-off has begun!

The global interest rate lift-off has begun!

GFC has been monitoring the price action in global bond markets closely over the past few months, and the recent price action appears to be portending a dramatic rise in interest rates that should gain momentum in the second half of this year.  As many other prominent economists have pointed out, the global bond (debt) bubble is shaping up to be the mother of all bubbles.  Years of artificial manipulation from central banks has led to the lowest interest rate environment anyone alive on planet earth has ever experienced.  Conversely, the central governments which have mostly constituted Western civilization for the last 250+ years are about to drown in the sea of debt they have accumulated.

One of the defining characteristics of the systemic risk that is now readily apparent in the U.S. bond market is the shockingly low level of liquidity.  Dealer inventory for fix-income markets has shrunk since the financial crisis while mutual fund assets, ETFs, and other financial derivative products related to fixed income have grown dramatically in size and scale.  The attached chart from Citi depicts the precarious situation developing for anyone thinking about trading a substantial amount of bonds.


These liquidity conditions are sure to usher in severe volatility as it is unlikely that dealers will be able to maintain tight price spreads when everyone rushes for the exits all at once.  Eurozone bond yields have experienced dramatic moves so far this year.   Most noticeable are the cracks appearing in bunds, which are the German equivalent of U.S. Treasury bonds.  The interest rate on the 30-year German bund bottomed on April 17th when it yielded just 40 basis points.  However, earlier this month on June 10th it was trading at 1.629%! -A move of over 120 basis points in less than two months! Likewise, the rate on the 10-year German bund traded down just below 5 basis points in April.  It’s incredible that anyone would lend the German government money for 10 years and only required five one hundredths of a percent in return.  The default risk should alone should be higher than 5 bps,  but what bond traders are essentially saying is that the inflation risk in Europe has gone negative and they are staring the prospect of deflation squarely in the face.

During this time in April when global bond yields were near their lows, legendary investor Bill Gross, who holds the distinctive Wall Street title of being the “Bond King” called German bunds “the short of a lifetime.”  So far he has been 100% correct, and the 10-year German bond rallied over 100 basis points from it’s low as bond prices fell.  We at GFC believe that this past April was just the first of many opportunities to go short German bonds like Bill Gross did.  This is likely the first move in a new secular trend that will likely last many years into the future as government finances in Europe and United States begin to unravel as creditors realize that have been playing a fools game with short-sighted and fiscally irresponsible politicians.

Looking domestically to interest rates on the 30-year Treasury bond, we can see that since late January 30th rates for U.S. government debt have had a substantial move upwards.  Rates bottomed at 2.22% and recently made a high at 3.23%.  From the chart below you can see that during this move, prices traced out a 5-wave Elliott Wave impulse pattern which implies that the trend has changed direction. It appears as though the 5-wave impulse pattern is complete and we should now expect some type of an ABC correction to retrace this signature move.  The target range for the correction to end is highlighted in the green box in the chart below.  After this forecasted correction is over, it will most likely represent an excellent time to short bonds once again, with an even more dramatic rise in interest rates likely to follow later this year and into 2016.


The low which was made earlier on January 30th,was likely the end of the a 34-year secular trend of declining interest rates in the United States dating back to 1981.  We at GFC cannot underscore enough how important the significance of this potential trend change is.  In layman’s terms, it means that the trend has changed from a 34 year environment where it had become easier and easier for the U.S. government to borrow money (which led to unmanageable levels of accumulated debt) to now an environment where it is going to be harder and harder for the U.S. government to borrow money as the cost of borrowing is set up to rise exponentially. From now on, the government of the United States is going to have a tougher and tougher time paying its bills.  If you are in the market for a mortgage, lock in a low interest rate now while you still can!  General expectations going forward should include widening budget deficits, an increased emphasis on tax collection, and extreme political upheaval.  The global interest rate lift-off has begun!

Written by

Phil Olson has been a devoted student of the financial markets since childhood. With over ten years worth of experience trading various investment products, he has developed an insightful way of discerning the price behavior of the market. His trading career took off when he proved to be on the correct side of the 2008 financial crisis by shorting stocks such as Lehman Brothers, Fannie Mae, and Freddie Mac. Since 2009, after capitalizing on the crisis-driven downdraft in financial stocks, he turned his attention to the foreign exchange market and became a successful currency trader. His extensive educational background in the areas of business and finance has afforded him the benefit of being able to apply two types of analysis (Technical & Fundamental) simultaneously to the market in order to identify high-probability trade opportunities. With his distinct and complementary approach to navigating the investment landscape, Phil became a trusted source for financial advice among his family, friends, and co-workers. Prior to partnering with Matthew to create GeoFront Capital, Phil Served as a Captain in the United States Air Force as a Contracting Officer responsible for authorizing, writing, and administering multi-billion-dollar contracts between the Air Force and the Aerospace Defense Industry. His successful experiences in handling large amounts of fiduciary responsibility on behalf of both Congress and the American tax-payer lend themselves well to the financial advisory services of GeoFront Capital.

Leave a Comment