What happened? Just a few weeks ago, we were worried that the treasury market was becoming a "black hole" that would soon suck in all financial assets. Instead, rates have reversed significantly. What does this mean and what does it portend?

First of all, here's where we were back in late July. The 10-year note had just fallen through 1.40% and it had everyone's attention: http://www.tfmetalsreport.com/blog/4046/two-things-my-mind. Here we are, 3-4 weeks later, and were at 1.82%. That is a HUGE move! What the heck happened? I think I have an answer but, first, some background.

Take a look at these two charts. One a is daily 10-year and one is a weekly. Note that the current price of the 10-year is 132.50. This is important because the area around 132 appears to be very important support. You can plainly see horizontal support on the daily chart but, looking at the weekly chart, 132 is also near the trendline from the lows of late spring 2011. Breaking that support and that trend would set a top and would foreshadow a move to 127-128. Now, look at the weekly chart. Notice that 10-year prices have been in a very long term up channel. Then notice that the past three Fed "programs" have been initiated when prices were near the top of the channel.

So, what is going on? Why the sudden dropoff in price? I think I have the answer. I posted this presentation yesterday. You may have already watched it. Watch it again and stop it right at the end, near the 57 second mark.

http://www.youtube.com/watch?feature=player_embedded&v=rOhSYd3lpaY

Simply put, The Fed is out of bullets. The goal of "Operation Twist" was to create demand for the 10-year and the 30-year, thereby keeping rates low and in a downtrend. They accomplished this "sterilized" program by selling their short-term bills and notes and using the proceeds to buy longer term notes and bonds. Now, look at that final frame again. The Fed is now out of paper to sell. Their current holdings in the 1.5 year and less range are negligible. Therefore, they have no more ammo. Now look again at that last frame. The Fed now owns nearly 70% of the outstanding 10-year note inventory. They are that market. There is hardly anyone left besides the Fed and the Fed is out of cash to keep it going. Suddenly, we have a simple imbalance of more sellers than buyers and...down goes price.

Notice what I said above, "the Fed is out of cash". Like athletic momentum or alcohol-induced desire, this is but a temporary thing. Let me state this clearly again: THE FED CANNOT AND WILL NOT ALLOW RATES TO RESET HIGHER. THE RESULTING BURDEN OF HIGHER INTEREST COSTS ON THE ALREADY ACCUMULATED DEBT WILL ONLY SPEED THE DEMISE OF THE PONZI AND THIS CANNOT BE ALLOWED. Therefore, with rates backing up and with the Fed out of liquidity to support a turnaround, the only option left is a re-ignition of overt quantitative easing.

Will this announcement come from Jackson Hole? Will it come from the next FOMC meeting on 9/12-13? Will it come at the following meeting of 10/23-24? It's impossible to say but what is possible to say is this: Watch the 10-year note. It will tell you.