This Could Trigger A Major Sell-Off For The Stock Market

Keith Fitz-Gerald: The esoteric – yet highly accurate – Hindenburg Omen we looked at Friday may suggest the probability of a market crash. But the number I’m watching this week could cause one.
As a standalone figure, of course, the yield on 10-year Treasuries is small. But the amount of money it impacts worldwide is flat-out staggering.
Out of the estimated $1.5 quadrillion dollars’ worth of derivatives on the planet right now, roughly $500 trillion is specifically related to interest rates.

So you can see why the 10-year gets so much attention. But right now, I’m watching it even more carefully… for one important reason.
When the Hindenburg was sounding the alarm last week, 10-year Treasury yields spiked at the same time, up to 2.8210% before relaxing a bit in early trading last Friday as of press time. That suggests to me the Fed is losing control over interest rates.
No doubt this is a frightening scenario, which is why it’s important to remember…
There’s plenty you can do about this now.
First, here’s why higher rates could have such a wide impact…
The 5 Side Effects of “No Control”
Many investors believe the Fed controls interest rates. That’s not true – they merely influence them.
As I have long written here in Money Morning, it’s the traders who have a death grip on our financial markets.
And if interest rates rise much further, the support the Fed is counting on in the bond markets may not be there. In fact, it may be running the opposite direction.
And here’s why that could trigger a selloff:

• Foreign custody holdings of U.S. Treasuries continue to decline, which implies that our trading partners don’t trust our repayment ability. So they’re moving on to other assets.
• Money managers are seeing extremely high levels of redemption requests and withdrawals from bonds. PIMCO, for example, experienced a $7.5 billion hit last month as money headed for the exits. The presumption is that the money is rotating into stocks, but the data suggests a solid portion is simply going back under the mattress. Somebody has to make up the gap; the only one big enough is the Fed. But if $85 billion a month isn’t good enough, you’ve got to wonder how much is. Bernanke’s replacement will have his or her hands full and the stakes couldn’t be higher.
• Loan volumes have fallen sharply as America continues to deleverage. International data suggests the same is true, generally speaking, throughout Europe and in Asia as well. So banks don’t need to buy Treasuries as a means of supporting profits and corresponding balance sheet liabilities. Combine that with huge real estate mark-to-market losses that have yet to be taken, and there’s a hole the size of Bernanke’s printing press to dam… or damn, depending on your perspective.
  

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