10 Reasons the Stock Market Will Move Lower in 2010: Part 5

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Collapse in U.S. Treasury Bond Prices:

The U.S. Treasury Bond market is on the verge of collapse. That's not surprising considering the recent economic policy by the Federal Reserve over the past couple of years. In order to spur growth and consumption, the Fed lowered interest rates down to 0%. Additionally, the U.S. Government announced about a week ago that 2010 would produce a record budget deficit.

The Federal Reserve lowered interest rates to the 0% level and has held it at this level for nearly a year. Rates can only go higher from here, and they will likely do so in dramatic fashion to combat inflation. The 2008 infusion of $2 trillion into the money supply combined with these low interest rates will no doubt cause a surge in inflation in the near future. Because of this, the Fed will be forced to raise interest rates quickly to keep this inflation at bay. Interest rates and prices are inversely related, so as interest rates rise bond prices will fall.

About a week ago, the U.S. Government announced that 2010 would create a record $1.56 trillion budget deficit. At some point, U.S. Treasury interest rates will have to rise in order to attract foreign investors to purchase U.S. debt. China has already indicated that they are becoming weary of purchasing our debt in light of the reckless spending over the past years.

Technically, the United States Treasury bond market looks ready to collapse in 2010. Looking at a weekly chart of $UST, which tracks the U.S Treasury Note, it has been setting up an extremely bearish complex head and shoulders pattern since the beginning of 2008. The pattern is nearly complete as the second right shoulder is currently in formation. When the neckline of this pattern breaks, it will take the $UST down to the $98 level which is a 17% drop from current levels. This drop will instill inflation fears into the market and take the stock market much lower in 2010.