Market Brief — Tuesday 9/18/18

Just when I thought the stock market was coming to its senses about the escalation of the trade war, the news reported that the stock market rose today on easing trade tensions. The U.S. is set to impose more tariffs on Monday and China is going to respond with more tariffs on Monday. If President Trump holds true to his words, there could be further escalations soon. Tariffs are nothing more than a stealth tax on American consumers.

Treasury short-sellers came in strong as buyers disappeared. Short-term yields are rapidly rising as the Fed is expected to raise the Federal Funds rate. To keep the yield curve from inverting, which is when short-term are higher than long-term yields, speculators continue to try to push yields higher.

From a technical perspective, there is a “gap” in 10-year Treasury yields at 3.058% set back in May. Ten-year Treasury yields closed today at 3.056% on light volume, indicating the recent buyers haven’t turned into sellers. Buyers want to buy at the lowest possible price and sellers want to sell at the highest possible price. When buyers see strong demand from sellers wanting to push prices down, they tend to allow prices to fall. Buyers don’t want to see previous buyers turn into sellers, so I expect buyers to arrive soon. Trading volumes increased on Treasuries going into the close as yields fell, which is indication buyers were waiting to buy.

It’s important to understand in a fiat money system, which we have, that monetary decelerations always lead to lower bond yields. Remove the speculative positioning from the short-sellers, and Treasury yields would likely be half what they are now. Save this thought for when the big Treasury short-squeeze comes.