Although T-Bond prices have tracked the dollar’s ups and downs most of the time, the chart shows that they have occasionally gone their separate ways, at least for a while. One implication is that the dollar’s powerful rally since early July is not likely to continue for much longer without eventually exerting an upward pull on T-Bonds. And this is what we expect, since our current rally target for the Dollar Index at 87.98 leaves running room that is almost equal to the impressive rally that has occurred over the summer. Since T-Bond prices move inversely to yields, that would augur lower long-term rates in the future.  Our curiosity about this dynamic is more than merely academic, since we have been recommending a bullish T-Bond play using equity options for leverage.

As to why a strong dollar has not sucked more money into U.S. Bonds, it could be because speculative money is being deployed directly in currency bets rather than in such dollar proxies as T-bonds. Whatever the case, our outlook is for much lower long-term rates, notwithstanding all of the fear and anxiety that has come to attend every utterance from the Fed. It is one thing for Yellen & Co. to pretend the economic recovery is strong enough to threaten us with inflation. But that is just the central bank talking its book — ‘managing expectations’, as it were. In reality, and as is plainly obvious, the recovery is so weak that even a small upward shift in rates would put the U.S. on the same recessionary track as Europe. In no event should we expect an ‘outbreak’ of inflation, and even less the kind of economic recovery that might strain the supply of dollars.