Bond Traders Declare Inflation Dead!

So the bond traders are declaring inflation officially dead.

And they've got a whole slug of reasons for this assertion, from Thomas Girard of New York Life Management announcing that he's no longer bearish on Treasuries (and he can probably buy a whole slug from Bill Gross out at PIMCO who's been throwing them out like they're on fire), increasing demand at auction, Helicopter Ben's moves to put some "moderation" in inflation, and even some reports of diminished supply.

But what's REALLY going on here? Why are folks like Bill Gross dumping bonds? Sure, there's a lot of evidence that suggests improvement--we just ran through that list above--but there's plenty of other reason that suggests problems afoot. For instance:

1. Money supply is increasing. The Federal Reserves' printing presses aren't slowing any, and the TCW Group (NYSE: TSI) in Los Angeles agrees with my call on this. Or at least their managing director Barr Segal does. Tons of money hitting the market reduces the value and primes for inflation.

2. Real interest rates are moving higher. This is Bill Gross of PIMCO's (NYSE: LTPZ) big reason to keep out of bonds for now. Just six months ago, real yields (which factor in inflation and deflation) were down at 1.03 percent. Just recently that number increased to 1.46 percent. Sure, that's still well below the twenty-year average of 2.73 percent, but there's a pronounced climb in there that should have bond traders worried.

3. The overall economy is still incredibly weak. Let's face it, folks--the phrase "jobless recovery" has never applied quite so well as it does here. Things are bad most everywhere except on Wall Street. Consumer confidence is still at astonishingly low levels and consumer spending--which is a major chunk of our economy--is still disastrous. Admittedly, this will drive some folks to the "safe haven" that United States Treasuries represent, but being the leper with the most fingers still intact doesn't get you very far. United States Treasuries are really only safe havens not because of any intrinsic superiority, but rather because they are, right now, simply the least worst option. Debt is at record levels. Tax receipts are down across the board. Spending is skyrocketing. Who wants to hold the mortgage of the guy who won't stop shopping?

I share Bill Gross' assessment of the bond markets, that they may have seen their best days already. But if bond rates go up, well, that may be a new time to get in. The bond as a safe haven isn't exactly terribly enticing these days, but the bond as an income stream? Now that's got my attention.