Positive Sentiment on Bonds Nearing Peak


As reported last week, Elliott Wave International has become bearish on bonds. While ultimately I do not disagree with them, I am not quite sure we have yet seen the highs.
Since Elliott Wave analysis is actually an analysis of market sentiment, it does make sense to me that we will be headed into a period of time over the next several years where bond yields would rise significantly here in the United States for the exact same reason or sentiment that we see in Europe. 
While many cannot really conceive of this possibility, based upon the pattern in the iShares Barclays 20+ Year Treasury (TLT), we are nearing a top of some significance. This is telling me that positive sentiment about the credit worthiness of U.S. government bonds is nearing a peak. Ultimately, it means that we will soon see a change in sentiment where many will be begin to question the ability of the United States to repay its debts. Since distrust is one of the reasons interest rates rise, this sentiment may very well be headed across the pond onto our shores very soon.
Again, many now view this as a preposterous proposition simply because we can seemingly print our way out of such a problem.  But, if we really take a hard look at how the government has printed in the past, all it has done was make more debt available in the system through Quantitative Easing programs.  They have not actually printed hard dollar bills yet, en masse, as Chairman Bernanke understands that this would definitely strike fear into the bond market.  Rather, they have engaged in programs that make more debt available to the overall system without retiring the initial debt vehicles. 
The manner in which the Fed has been attempting to affect the monetary base is by injecting credit into the system. They do this by a process called monetization of debt. The Fed acquires Treasury issued debt instruments in the open market and then issues the seller bank a credit on its books for the acquisition price in its Fed account. In effect, the Fed simply creates a book credit on the bank's balance sheet that did not exist before, as it does not send cash to the bank. Since it never retires the debt instruments it acquires, it is simply adding credit to the monetary base by these acquisitions and extensions of credit to the seller banks. Their goal is to allow the banks to provide further loans to the investor society at large, which would in their view, stimulate the economy with further public credit infusions.
The problem with such an attempt at creating inflation through such a credit expansion method is that there has to be not only a willingness to issue credit, but also a willingness to maintain or even accept further credit expansion by the public. For if the public is deleveraging at the same time that the Fed is attempting to expand the credit base, then the Fed is fighting an uphill battle.
Let me give you an example. If the demand for computers started getting a little sluggish and the government wanted to attempt to boost the demand for computers, it would decide to subsidize the sales of computers by 10%, offering computers to the public at 10% discounts. Initially, demand may rise. But after a certain amount of sales, demand will fall off again. The government then subsidizes sales by 40%. Again, demand spikes but then falls off. The government ultimately will fully subsidize these computers and provide free computers to the public.
Assume you buy a computer when they were discounted by 10%. Then you decide to buy one for the children when it was discounted by 40%. Then when the government started giving them away, you took three more. But how many computers are going to be in your home before you say "no more." There comes a point where you don't want any more computers, since there are only so many computers you can actually use for ANY purpose.
Based upon his primary use of monetization as a means of sparking the economy, Bernanke has made it clear that he views actual printing as a dangerous activity.  So, I am not so sure that actually printing our way to handling our debt is a feasible idea, as it may cause more problems than solve.
Based upon the TLT chart we have a pattern that can still provide for a move in the TLT up to the 133 region. This could very well mark a significant top if the top has not already been met. The issue with this wave in the chart is it is always an open question as to how far this fifth wave can become extended. So, for now I will expect the 133 level to be our next target for a potential top in this market, unless we break down below the 121 level, which would provide a strong indication that the top indeed may have been seen.