- Richard Russell, editor of Dow Theory Letters, had this
to say about the death of the 30-year bond:
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- The long T-bond has been the barometer of inflation.
But damn it, Greenspan just couldn't get the long bond down. While short
rates sank by 400 points, the long bond only dropped 12 points in yield.
What to do? Why that's easy -- get rid of the rotten long bond. No more
long bonds. The Fed-Treasury bunch cut off the long bond because they didn't
want an inflation barometer.
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- A 30-year bond is nothing but a call on dollars that
pays interest to the owner while he waits on those dollars. If interest
rates truly go down, then the rates on long-term bonds should go down as
well. But, as Russell noted, while the Fed has dropped short-term rates
400 basis points this year, the long bond (30-years maturity) has fallen
only 12 points. To the sophisticated, this is evidence that bond market
fears inflation.
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- If inflation were not a concern to long bond buyers,
they would be willing to accept less interest. However, long bond buyers
want higher interest rates to compensate for future dollars that will buy
less because of a lost of purchasing power due to inflation.
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- The Treasury may say that it is canceling the long bond
because is can now borrow at lower costs via shorter maturity instruments,
i.e., T-bills and notes. Nevertheless, borrowing long provides the benefit
of not having to go back into the bond market when interest rates are high.
The Clinton administration lowered interest costs by moving much of the
federal debt into short-term instruments. On interest rates spikes, however,
the government had to pay more for its money.
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- Still, it cannot be denied that a major benefit to the
government of canceling the long bond is to deprive the marketplace of
an accurate barometer of inflation. This makes the damaging effects of
printing of fresh money less obvious and entices the government to print
even more money.
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- The cancellation of the long bond has opened the door
a little further to massive inflation. Wednesday's and Thursday's gold
and silver buyers reacted appropriately. When the inflation floodgates
are opened, buying more gold and silver is appropriate.
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- http://www.goldstatistics.com/commentary-spots.htm
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