The 10-Year Bond now has a Yield of 2.08% right before the all-important Fed Quarterly Meeting and Press Conference this Wednesday, the 10-Year basically lost 24 basis points in a week, and mind you the week right after the strongest Employment Report (a positive 321,000 jobs added for the month) since the Financial Crisis, capping what has been a remarkable year in added jobs to the U.S. economy, even wages spiked 0.4 % with strong upward employment revisions for the prior months. In short, in a normal functioning Bond Market Yields should be rising with improved economic conditions. Especially in a week with a robust Retail Sales Report up 0.7 % for the month. Bond Yields in the U.S. should be much higher given the strong economic performance for 2014, and the Fed not only exiting QE, but about to start raising rates in 2015.

Too Much Cheap Money Sloshing Around Financial Markets

In short there is just way too much liquidity in the system, and buying of any assets is what follows regardless of price or the fundamentals, and the Bond Market is such a bubble right now that the Fed needs to start pricking it fast before it crashes all at once where everyone tries to get out at the same time, which of course they cannot do. This is where a responsible Fed comes in and prepares the Bond Market for the inevitable Rate Hikes in 2015.

Low Gasoline Prices are Inflationary in the Big Picture
The latest argument for inflating the bond market bubble has been the drop in oil prices indicating strong deflationary pressures but this is just a poor understanding of economic theory. High oil and gasoline prices are deflationary over the long-term whereas low oil and gasoline prices are stimulative for economic growth, and actually inflationary over the long-term. And I think the Fed economists are sophisticated enough to get this relationship, that in fact lower gasoline prices will add to GDP growth in the coming quarters, and put even more pressures on inflation with a transfer from the bad comps of energy prices year on year, over to other core components as this new found wealth by consumers in the form of a massive tax cut finds its way into other buckets like dining and retail expenditures, all of which have additive effects for the U.S. economy. In short cheaper energy costs are a net positive for the global economy, it leads to more productive and sustainable economic growth.