Big Bond Bubble Beckons Bears, Buries Treasuries, And Busts Fixed Income Investors

Back in March, Barron's ran The Case For Bonds, poo-pooing a spate of articles back then on a bond bubble. The expectations were that the ending of Quantitative Easing (QE) would lead to a rise in rates. As we know now, didn't happen. 

What did happen was the Euro debt crisis drove money to safer havens in Treasuries, and the pronouncement of a continuation of QE led observers to expect a bigger QE2 ahead. Bonds soared as rates dropped. In the last few weeks, however, we have seen them reverse dramatically (chart from StockTiming):

 

Marty Chenard (of StockTiming) notes how the 30-yr has come back to a recent resistance level at 38.34 (see chart), suggesting a break will lead to a bond bust of very broad proportions. The bust is already being felt. Monday's WSJ will report how the last ten days have shaved 2.5% off the 10-yr, a sharp drop after a five month stunning rise. Bespoke noted late last week how the drop in bonds was already being felt in bond funds, and had raised the spectre of a breakdown in fixed income:

More ominously, the 10-yr has has not broke above the five-month trendline, an indication (if it doesn't reverse quickly) of a change of trend for a considerable period:
  
 

Credit for an auspicious call goes to Jeremy Siegel in the WSJ, whose op-ed The Great american Bond Bubble published on August 18, right as the trend reversal was starting. He noted how a reversal from the 2.8% rate then to the 4% rate of a mere five months ago would cause a capital loss 3x worse than the low yield. This led to a new spate of Bond Bubble articles. An update is here. 

An even earlier call came from ZH, which noted that global industrial production got back to pre-recession levels, and drew the implication that a Global Bond Hiccup was soon to come:

 

Before the bears celebrate, they should ponder what changed: expectations of the double-dip abated around the time the bond yields bottomed. If you have been following my posts on the Double Dip Countdown, I put the count on hold in early August, started it again around August 18, and have it on hold again - reflecting ambiguous economic signals. This has two big implications for rates:

• a flat patch would cause the Fed to hold off QE2, which suppresses rates
• a real recovery would cause market rates to rise, and the Fed to follow

Now fixed income investors face a dilemma: if the recovery is on, rates will rise; but if this is a mere blip before negative double-dip news begins to come back, rates will fall back. Should they stay (in bonds) or should they go? 

I will comment separately on munis in a later post, bit as to Treasuries, these are the circumstances where technical analysis may give better advice than struggling with conflicting and ambiguous fundamentals. Friday's STU has a wave count which is pretty daunting: the recent low rates reflect a 62% retracement from the low rates in 2008 to the recent highs in April. This suggest rates are going to continue to rise. Right now the technical indicator to watch is a definitive break of the trendline (see chart above). 

Comments

[Wave Rust]

chasing money out of bonds into stocks is just the same old game again.

they fall for the scare in then out of bonds every time.

shrink your johnson, buy stocks.

wave rust

[Account Deleted]

Dow Jones futures before opening bell:CLICK HERE

[Sherman "double long" McCoy]

the easy retail trade to express this view is to load up on TBT. At a minimum it seems good for a trade.

[JT]

Equity Bears getting crushed once again. P3! P3! P3!

LOL!

[Someone who isn't a societal leech]

This site sucks...

Prechter's shlong.

You love/admire/respect/worship/shill for that scumbag.

Please. Go to hell together.

[?]

"the easy retail trade to express this view is to load up on TBT. At a minimum it seems good for a trade."

++++++++

The trouble with this strategy is that TBT is leveraged and when you are waiting for the rise in yields (say it takes 2 years) you can get killed by the "decay".

[Wave Rust]

Hey, "Someone who isn't a societal leech", you said,

"This site sucks...
Prechter's shlong.
You love/admire/respect/worship/shill for that scumbag.
Please. Go to hell together."

You need another free subscription to EWI. Don't give up now. It gets better soon. As soon as you cancel, they get it right. LOL

Actually, you can't rely solely on a newsletter writer. You have to know something about markets ,,,, well, you need to know alot in reality.

first thing you need to know is how to control your emotions after losing the big wad. After a few years of practicing how to control your emotions, then you can start to learn how to do technical analysis. After that, you can learn what works and what doesn't. All that shouldn't take any longer than 5-7 years.

And, that's just the beginning.

wave rust

[Mamma Boom Boom]

Rusty, I think that was JT using one of his aliases.

[Michael]

Wrong again Momma Boing Boing...
No one in our trading group made that post, even though it was pretty funny!

Notice that the Avatar is not the same as the "shared" IP address that we are all on.

[Mamma Boom Boom]

Michael, you're such a 'nerd'. I was joking.

[Michael]

No problem Mamma.
:)

Interestingly enough, the Nasdaq is +45 points today with Mr. Softie hard as a rock and going to the Moon. Can't recall the last time I saw the stock up that much . . . SPX getting close to that 1129 number as well. Gee, I wonder what the Elliott Wave Guru Prechter/Hochberg will say in tonight's STU?

LOL!

[Michael]

No problem Mamma.
:)

Interestingly enough, the Nasdaq is +45 points today with Mr. Softie hard as a rock and going to the Moon. Can't recall the last time I saw the stock up that much . . . SPX getting close to that 1129 number as well. Gee, I wonder what the Elliott Wave Guru Prechter/Hochberg will say in tonight's STU?

LOL!

[Whitebear]

Now, it's time for the Guru Prechter to turn bullish and the market will turn sour. Recall how they were looking for a further leg up early May just before the flash-crash.

[Michael]

Who said that the month of SEPTEMBER was bad for stocks???

The S&P is +72 points since August 31st.

:)

[OracleLurker]

seems like we should settle into a a trading range between 1115-1130 that runs into opex - then a deeper pullback into next week before we start the second phase of this uptrend?

I think all of the village idiots I follow covered today.

[Hanmak]

Any thoughts on the implications of the recently announced POMO schedule through early October with this article. Seems like the Fed is forcing fixed income investors to join the equities road show.

[JT]

Tons of "Conspiracy" theories at all of the Perma-Bear blogs today regarding the NY POMO schedule running thru mid-October to the tune of $27 Billion.

Today was a NY Federal Reserve POMO today, as well as this coming Wednesday and Thursday. But what I don't understand is how all of these perma-bear bloggers and posters can explain the FACT that settlement doesn't occur until tomorrow (for today's operation). Thus, their "conspiracy" theory as to today being a POMO day and that is why stocks rallied strongly is full of BS. The dealer community doesn't even see the securities "settle" in their account until tomorrow. Duh.

Just take one look at the article that appeared by Tyler Durden over at ZeroHedge that suggests that the bond dealers now have $810 billion ( 30 x's leverage on $27B ) to rally the stock market with between now and mid-October. LOL!

Then take a look at some of the posts following the article. It's downright comical.

Some of these guys wouldn't know how to make money if you rubbed their noses in it. Such is the life of a PERMA-BEAR!

[Hanmak]

Okay JT, where is that money going? Honestly, instead of racking it up to conspiracy, give us an alternative scenario for that money. The market hasn't gained 80 points on record low volume in 9 days, without a legitimate corrective move, on good economic news.

Awfully big coincidence that the PD's have 18 billion new dollars to work with over last 30 days and market produces an amazing act of levitation.

[Wave Rust]

Perma bears are market gods to me. I might have a harder time trading if it wasn't for them.

When they cover though, I start looking for the exits. I didn't see any evidence of them covering today.

btw, the pseudonym Tyler Durden is one of the names for the multiple personalities of the self-destructive main character in the book, "Fight Club" ,,,, kinda like perma-bears, I think.

wave rust

[Wave Rust]

hanmak, what is a "legitimate correction" in a bull market? or in a bear market?

spx is at the top of the recent trading range. are you short or long or flat?

have you ever seen a market go 15 or 20 days without a down day? they usually happen in the ugly beginnings of 3rd waves. it keeps the riffraff off of the long side.

beware of third legs!

wave rust

[Hanmak]

wave rust, I am flat. I have seen a market go many days without a down day, and I am not an EW'r so 3'rds are not relevant to me.
Watching a market go 9 days without a corrective move given the schizophrenic market as we are in, does raise flags for me. Watching the spikes in the CPCI, CPCE it is unusual. More so considering macro economic factors.

[JT]

Hanmak,

Please answer my question about how the money that the bond dealers receive from the NY Fed's POMO operation is able to go into the market when the securities don't even "settle" until tomorrow???

Has it ever occurred to you that a large percentage of money managers have been far too bearish, have had a lousy year, and are underperforming with only a few months left in the year?

[Zendo]

It's like a year ago, when yelnick and the rest of the ewi blogs kept posting top is going to be in, the market runs up for next 6 months.

If ewi can only catch 1 big drop every 10 years or so by screaming about it every 6 months, good luck.

[Wave Rust]

Hanmak,
maybe get a down day on thursday.

this move looks like it's trying to get an impulsive look to it. that ='s bullish.

spx 1150's then the 70's

whose johnson is shrinking now? molecool?

wave rust

[twitter.com/DrBubb]

An umpleasant bunch of posts here, so I wonder why I bother, but here goes...

Speaking of Bond Bulls and the Hyperinflation alternative, an argument between Mish Shedlock (Bond Bull) and Gonzalo Lira (Hyperinflationist) has broken out. Thanks to some posts on ZeroHedge over the last few days, it has "gone viral", attracting 1,000's of posts and podcast downloads.

The battle described: http://www.zerohedge.com/article/gonzalo-lira-proposes-open-debate-mish-topic-xxflation

If you want to here the original podcasts, they are on my GlobalEdgeRadio website. Links follow:

1/ http://tinyurl.com/GER-hyper10

2/ http://tinyurl.com/GER-LiraHyp

[yelnick]

Dr Bubb, thanks for sharing. It is well worth diving into to gain perspective on the Bond Bubble debate. And it appears to be likely to spawn an entertaining debate between deflationists, inflationists, hyperinflationists, and ranters.

[twitter.com/DrBubb]

Yeah,
And the mud keeps flying back and forth- again today.
For the latest:
Mish Refuses to Debate Gonzalo Lira
http://tinyurl.com/GEI-MishLira

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