After Friday’s Hilsen-Rumor put an exclamation point on the idea that bond yields would be turning around after a six week wild ride to the upside, lo and behold what a new week begets.  Yields held steady early in the day and a late article by the Financial Times now has the tapering of QE back off.  TIPS immediately sold off and the 10 year is back to 0.15% after closing last week at 0.09% and a peak of 0.21% on Wednesday.  All of this bond volatility occurring in the days leading up to the next FOMC minutes release is beginning to seriously unnerve markets and me, frankly.  Gold was the only thing today nonplussed by it all, with the boot heel of the desperately short hedge funds still on its neck and not being allowed to stray far from the $1385 line in the sand that has been drawn.

At this point your focus should be turned to emerging market bond yields because if they continue to rise this will continue to put upward pressure on U.S. and European bond yields as liquidity dries up and de-leveraging occurs due to the unwinding of the Yen carry trade.  At some point someone better get a hold of the Yen and push it back near 100 or ugliness in Southeast Asian bonds will begin unraveling.

And while the Fed does not want to project a deflationary environment it is doing so by allowing real yields to rise in the face of zero credit growth in the U.S. banking system.  Don’t believe me?  Go look at this.  Then go look at this.