QE II Bet Starts to Unravel

Signs in the yield curve, municipal bonds, junk bonds, and commodities suggest the one-way "sure thing" QE II bet has started to unravel.

Curve Watchers Anonymous is particularly interested in the yield curve.

Yield Curve 2010-11-12



click on any chart in this post to see a sharper image

A representative of Curve Watchers Anonymous said "I have never seen action like this before. The middle part of the curve is blowing up even as the long bond rallies. The action indicates that everyone who front-ran the Fed purchases is now unloading to the Fed. "

The 5-year is off 14 basis points while the 30-year is up 8. This is quite unusual to say the least.

Municipal Bond Fund Shellacking

A tip of the hat to Barry Ritholtz for noticing the California Muni Bond Fund Shellacking

Since so many of you have asked: These funds are getting mangled on expectations of � All Aboard! Munis and California joining Ireland on the default train. Even the general Muni funds have lots of California Exposure

PCK PIMCO California Municipal Income Fund II



PML PIMCO Municipal Bond Fund II



click on chart for sharper image

JNK Lehman High Yield Bond Fund



Metals



Grains



It remains to be seen if this is the start of a serious correction or just another dip-buying opportunity (in literally everything), but with sentiment sky-high and nearly everyone believing QE II is a one-way bet, I am more inclined to believe the former.

As far as gold goes, I do not expect the shellacking we saw in 2008. In fact there might not be much of a pullback at all. However, I can easily be wrong.

As far as equities go, action in junk bonds will be particularly important. If and when the corporate bond market cracks, it will be all over for equities.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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