While market cheerleaders can’t wait for the Dow to get past 11,000 again, other assets are going higher too. Notably, gold and silver have surged recently (more so than stocks) and bonds have soared too (the price has gone up, meaning the yields have gone down).
The 10-year yield is now at 2.40%, something we have not seen since the depths of the recession in January 2009.
Of course, this is all due to speculation the Fed will ramp up QE2. It will buy government bonds (hence buy now since a sucker will buy later). Since the monetary base is expanding, fears of dollar devaluation are driving up metals and stocks.
I suppose it all makes sense, but it also doesn’t. If the dollar devalues (or we have inflation), those bonds are going to go down in value (as investors will want more yield). Especially given that many buyers of US treasuries are foreigners, they would be especially concerned about a drop in the dollar.
Even if the Fed buys treasuries, if it really will dismantle the dollar in the process, there will be more net sellers and the yields will rise. That or the Fed will buy so many treasuries that we’ll actually have a hyperinflation scenario as everyone will flee the dollar (even though treasury yields will stay low).
But, alas, that’s not happening. I do think demand for treasuries are born largely out of fears of a douple dip deflation risk more so than hoping to sell high to the next sucker (the Fed). Last time the Fed announced QE, treasuries rallied but then got brutalized as the recession ended and hopes of economic growth resurfaced.
The markets may stay sidewise for a few months. However, I think we’ll stop seeing all assets go up. Stocks may continue to rise, bonds may continue to rise, gold may continue to rise, but I doubt all three will.