Bonds Getting Ugly Again

Caveat is these are always good reversal spots. I often post incorrectly at turning points because I'm looking at charts and seeing that continuation of a move signals a seismic shift in financial markets.

With the caveat, if bonds continue lower, a breakdown in ZB and breakout in 30-year yield correlates with about 5 percent interest. That isn't a crazy target when considering the Federal Reserve is talking about a 4-percent Fed Funds rate. I do expect deflation and a rally in long bonds, but if I'm wrong, it isn't a wild target. It would take ZB and TLT back to 2007 levels of around 110 and $90 per share. Note that TLT is dividend adjusted, remove that and you will see TLT at $90 when the yield was around 5 percent.

Throwing a wrench into any bond forecast is my bearish outlook for stocks over the next two months. I expect the next move in ZB will either be bad for stocks (down) or will be because stocks are performing so badly (up). Stocks down is my main forecast at the moment.

One way the market could crash is if the 30-year bond sells off another 20 percent from here (which hits the aforementioned targets). I have in the past often discussed a crash scenario where the market is dropping because of inflation and/or a weakening U.S. dollar and the Fed's only solution at the point would be interest rate hikes. While I expect deflation, I could also imagine a mirror of 2020. There was a brief deflation panic that gave way to roaring inflation only months later. Here in 2022, there could be on final plunge in bonds that helps fuel the final selling wave of 2022 and delivers a much stronger tradable low. 

If Powell wants to go Volcker, that's the right move here. Front load all the pain into the next two months and inflation as recorded by the CPI will be negative.