US Nonfarm Payrolls. Gross!

What a weak-handed attempted to recover $7.7 billion in redemptions last month.

That’s the amount of money that flowed out of Pimco’s $41 billion Total Return Fund in August. And Bill Gross is trying to stem the outflows by promoting the NEED to be in short-term Treasuries and credit.

He and his colleague, Mohamed El-Erian, are campaigning with their predictions for a very unstable investing future, albeit one where the Fed continues to maintain historically low interest rates.

They may be right about the increased instability, the low-interest rate environment, or both. I tend to think they’ll at least be right about the Fed sticking to its low interest rates policy …

As it concerns the more immediate future — the taper — I think the Fed will at most gesture with a small decrease in its monthly bond purchases. But it will need to simultaneously emphasize its continued commitment to low interest rates, monetary accommodation and new bond purchases if needed.

The Fed is nowhere near an exit if you consider the global dependency its policies have created. The global economy is not ready to stand without the Fed’s crutch.

What does this mean?

Well, sticking with Bill Gross’s area of expertise, I think bonds may find some support here. A colleague of mine this week called shorting bonds “the easiest trade in the world right now.” As such, he seemed as reluctant as I am to jump on this easy trade right now.

On a weekly basis, this drop in bond prices (rise in interest rates) appears to be overextended. In looking at a weekly chart I noticed a similar price pattern between now and late 2010/early 2011.

In the last four months, the 30-year Treasury Bond has fallen nearly 13%. In the four months ending January 2011, the 30-year Treasury Bond fell just over 13%.

What happened after January 2011? It’s interesting you ask. The 30-Year Treasury Bond price rallied 40%, low to high, over the following 17 months.

Now, I know this is not a perfect and certainly not a scientific comparison. So many things are different different between now and then. So this pattern may not be an apples-to-apples comparison. And it may not be a trading signal you’re comfortable jumping on.

But it may be worth considering nonetheless. It may show we’re close to a maximum tolerance level for interest rate increases over said period of time.

The US Nonfarm Payrolls report this morning was not stellar. It wasn’t overtly bad either. But it was soft enough that it gets investors thinking more about the anticipated certainty of the Fed taper.

Minneapolis Federal Reserve Bank President Narayana Kocherlakota recently said the US economy needs more stimulus, continued QE. He says the Fed’s own forecast on inflation and unemployment calls for continued accommodation. If the Fed does decide to taper, this suggests it will be a marginal move — a gesture — that keeps its ultimate commitment to accomodation intact.

Interest rates may find at least a temporary top if this idea gains traction.