Hostage to the Bond Market

 | Aug 22, 2013 | 12:00 PM EDT
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Could we be more hostage to U.S. Treasury bonds? I can recall whole periods when we had to keep one eye on bonds, but both eyes? That's where we are now. You'd be able to handle some sustained damage to earnings if bonds were to calm down, but this is an angry, mean bond market that is bent on revenge. It's also a fed-up Fed chief that is sick and tired of having to do all the lifting as Congress focuses on lifestyle issues and President Obama debates more tax increases.

In the end, how many houses can the Fed really sell? How many bridges? Tunnels? Exit ramps? Plus, there's a little ridiculousness here. We keep playing the parlor game of wondering when the Fed will be done with its bond-buying. May I just say that, if this is what the bond market's like when the Fed is buying, who know how high rates will shoot when it isn't? Because, right now, no matter how many bonds it buys, the sellers are overwhelming them.

If I were Ben Bernanke, I would stop talking about what I was doing, can the transparency and play a little coy. He's telegraphing every bond punch, and the bond vigilantes are coming right back at him. Right now the sellers have the edge. It's time to step out of the ring, particularly given the relentless rise to 3% and 4% on the 10- and 30-year notes.

One has to ask, by the way, who the heck is still selling here, given the fact that we don't have any real demand at these levels -- unless all you care about is the "pent-up" demand for homes that the Fed keeps citing. I know the builders are all optimistic, but let's face facts: We are getting data points from giant lumber company Louisiana-Pacific (LPX) about a dramatic decline in lumber being bought for homes. We are seeing order growth for new homes slow, and as Doug Kass has chronicled endlessly and correctly here, refinancing and mortgage applications are sinking like a stone.

I think we're due for an oversold rally in bonds and, therefore, in stocks. But I also know that, when the players are angry, they really overshoot -- and the anger is palpable among those who want out of bonds.

Beware of them. They are doing all the tapering the Fed needs to do, even as the central bank apparently still battles daily to rein in the selling and keep rates down to levels that won't make mortgage rates spike any further. As we have now heard endlessly, the damage to the real economy is being done, and I don't think Bernanke is going to get his wish that the rest of Washington will help out a little. They are too busy discussing foreign aid and, finally, investigating the banks and continuing the empty-headed sequester that is now playing real havoc with the consumer's head.

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