Tonight's Money Supply Report

M2 rebounded in the most recent money supply figures released by the Federal Reserve.

The preliminary January 31st measure stood at $8.868 trillion. Annualized M2 growth over the past 13 weeks was 4.9% vs. annualized growth of 5.1% and 3.7% for the past 26 and 52 weeks. While the strong surge in M2 first noted last fall has eased somewhat, M2 growth continues to trend in a direction that suggests inflationary risks are increasing. Prices on U.S. Treasury bonds have begun to reflect those inflationary fears as yield on the 30-Year are now over 4 3/4%. Rates on 30-year fixed mortgages have also risen sharply this week and have now surpassed 5%.

Tonight's Money Supply Report

M2 contracted slightly in the most recent money supply report released by the Federal Reserve tonight.

The preliminary January 24th measure stood at $8.828 trillion. Annualized M2 growth over the past 13 weeks was 5.0% vs. annualized growth of 5.1% and 3.6% for the past 26 and 52 weeks.

Treasury bonds this week have performed horribly. And at the close this evening, the yield on the 30-Year was up to 4.66%, it's highest close since April of last year. I expect bond yields to continue to rise through the year, and for bond prices to continue to decline. Given recent price action, Treasury Bonds are not as attractive as a short candidate as they had been in September and October. At this juncture, I would not add any new short positions in Treasury bonds. However, I would still avoid purchasing them in this monetary environment.

Three Predictions for 2011

1.  Bonds will continue to get clobbered.  I've written extensively about what's taking place with M2.  Money supply growth will be one of the factors behind the destruction of bond values, but the economic rebound taking place will also add pressure to bonds as investors seek out better investment opportunities.  Yields on the 30-Year Treasury Bond should easily top 5% before year's end.  Unfortunately, many investors will learn that their "flight to safety" wasn't so safe after all.

2.  Stocks will continue to recover, but volatility will increase.  Volatility in the bond market will make itself felt in stocks.  But the trend for growth in corporate profitability remains intact.  And a positive yield curve is extremely helpful for growing corporate profits.  This is a great set-up for the S&P, if you can stomach the roller coaster ride.

In many ways, this year is reminiscent of 1994/1995.  Few remember the bond crash of 1994, but there's a great paper that discusses its aftermath here.

3.  The U.S. dollar will firm up against most currencies.  Unfortunately, this will be bad news for commodities investors, as a stronger dollar will dampen gains for most raw materials.  I might not bet against $100/bbl oil.  The markets for crude are always insane, and the same goes for gold.  But as a whole, expect commodities to post lacklustre returns for 2011.

Treasury Bonds In Deep Decline Today

With today's action in the Treasury bond market pits, where the March 30-Year Treasury futures are now under 120, anyone who is short might want to consider covering at least a portion of their position.

There is still no compelling reason to buy long-term Treasury bonds at these levels, but it's possible we'll see a bounce back into the low 120's that could be shorted before bonds resume their course to lower levels.