“Friday
was an extraordinary day. Stocks and oil posted strong gains while
precious metals were sold off. The strength in the stock market was
attributed to a positive jobs report, and the rise in the price of oil
was associated with the unrest in Egypt. Precious metals hit another
air pocket, but the source of the selling was managed money, not from
the bullion banks.
But what was really significant was the carnage in the bond market....
“We cannot recall a worse one-day selloff in
bonds. With continued talk of the Federal Reserve tapering their bond
and mortgage buying, one would expect interest rates to rise in a
controlled, gradual, and engineered manner. That certainly was not what
we witnessed on Friday.
In
the 1970s, we talked about “crowding out” as an explanation for why
rates began large secular increases. As the government demanded more
from the private sector to fund the Vietnam War and the social programs,
that meant less capital for individuals and corporations. The
competition for capital caused rates to rise. There was not enough
capital to go around, and some contenders were crowded out.
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