Here's a significant story that's not getting



much play:

Chart 1 shows 10-yr Bonds breaking below support

For over 2 months, Long Bonds have been marching

relentlessly lower, breaking key support at 106.

50 on Friday. The next downside target is the Jul

06 lows at 104 (which equates to 5.25%).

Here's where is gets curious:

The news last week was decidedly negative, weaker

than expected 1st quarter GDP growth and a string

of layoffs from some of the nation's biggest

employers (Dell, Pulte Homes and IBM).

That's a sign growth is slowing which should be

bullish for Bonds. As price inflation fears

subside, Bonds should rally. Hell, even Gold buys

that story and has been moving lower since early

May. So what's happening? Why are Bonds tanking?

I know markets discount the future and that news

is effectively ancient history. I've been telling

subscribers for a while that there are

intermarket forces at work pulling Bonds lower and forcing

yields higher. That force is a declining US

Dollar, where Bonds have been following the

Dollar lower with a 2 to 3 month time lag. [The

US Dollar bottomed in late April so we have at

least 1 more month of Bond weakness ahead.]

But that still doesn't answer the conundrum, why

are interest rates rising in the face of a

slowing economy?

By the way, since February, the short end of the

curve has been dropping precipitously. The yield curve has

widened substantially, even righting itself from

its previous inversion. Investors are voting with

their wallets and they're saying the Feds next

move will be to cut interest rates in response to

a slowing economy.

So if short term interest rates get it, why don't

long rates?

I think they do.

Chart 2 shows the Nikkei weekly ; Gold and 10-yr US Yields

The major holders of Long-term US Bonds are

Japanese investors. A slowdown in the USA is

causing Japanese investors to sell US Bonds (

raising rates) and repatriate the funds back home

to invest in Japanese stocks which offer more

promising prospects. More promising because Japan

is a net exporter and the weak Yen is a boon to

Japanese Corporations.

The upshot for Gold investors (as the above chart

shows) is that Gold is very closely tied to

rising Japanese stocks. Interest rate sensitive

Banks and Housing are most negatively effected.

A slowdown in growth is causing a shift out of US

long-term debt into the Nikkei and by correlation

into counter-cyclical Gold. Expect the above

trends to remain in place for some time to come.

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