Bonds – the Approaching Bear Market
As per usual, virtually everyone was bullish on US Treasuries into the July 6th low yield on the 10 year Treasury of 1.35%. Almost two weeks ago, my belief was the 10 year will see ending action above 2.4% and an entry point to go the other way for a trade. The yield reached 2.42% and we have seen ending action, along with hysterical talk of a bond market crash. On the annotated 10 year yield chart, we can see the recent low yield in July was actually a re-test of the 7/26/2012 selling climax (inverted to the price, since this is a yield chart), when the low yield was 1.39%. As I’ve written about repeatedly, like here, we are witnessing the end of the massive 35 year bond bull market which started on 10/26/1981, when yields topped at 15.21%. And this is happening right before our eyes – truly historic – so we should pay a lot of attention to this. It will be a tremendous learning experience for all of us and it will be written about in the history books (although probably incompetently and with bias). And it is still my belief this long term chart of US Treasuries is the most important chart in the world.
So where do we stand now with bonds. For perspective back in June before the push to new record lows on July 6th, my belief is we’d still likely get one more push down to new record lows. That is very unlikely going forward, as 2017 has been the likeliest time for the longer term yields to finally join the barely noticed major bear market in shorter term US Treasuries. Shorter term Treasuries are at 8 year highs (prices at 8 year lows). For years we’ve heard people tell us the Fed would bring negative rates to the US, oblivious to the fact that the market was already telling us short term rates we’re headed higher. And since the Fed followsthe market, they do not lead, the market was already “telling” us what the Fed would be doing. Short term interest rates bottomed in 2011. It’s very likely in a few years, people will be talking about 2016 as the bottom in long term rates. So currently, bonds (prices) got very oversold, the sentiment was hysterically bearish, and we reached important support levels (2.40%+ on the 10 year yields – inverse) – nearing a set up for a shorter term trade. We should see the next excellent short selling opportunity beginning of next year. And my strategy going forward for bond instruments is geared towards inflation adjustable products.
Everything I see from the President-elect is just a continuation of the policies of the last several decades. I’m baffled how any “free market” proponents could be excited about what Mr. Trump is proposing. Absolutely nothing about truly cutting government spending is going to be done. Which means (maybe we’ll see) tax cuts, which are supposedly going to “pay for themselves”, which as far as I know, has never actually happened. I’m all for cutting taxes, but if whole Departments are not chopped off, it means more borrowing and “printing”. It’s just a beautiful set up, economically, for 2017 to really get the bear market in bonds to kick it up a bit. And it is not an “improving Trump economy” which has me worried about the push higher in yields. For years it’s been the exact opposite – meaning we’re heading into a period when the horrible economy and credit quality issues, which will be the huge problem for all types of bonds.
About
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.
'Trader Scott’s Market Blog – Bonds – the Approaching Bear Market – November 28, 2016' have 7 comments
November 29, 2016 @ 12:58 am Aamer
Thanks scott for a timely piece. Went long the TLT last week …..agree that we may see a low or even a lower low before the next move up.
A couple of related questions on this – if bonds are going down….are we likely to see the previous relationship restored in lower bonds , lower stock mkts ?
Also is it really baked the idea that we see higher inflation as a secular trend unfold ? All we need is further devaluation in the CNY etc weaker Europe etc for deflationary forces to continue ? Like you I see that copper is on the move with other base metals and I see yields on the move etc but it’s possible that these are ST moves…..don’t see how demographics and robotics and the need to deleverage can create inflation despite the moves in the above asset classes ? Finally almost everyone is sold on this idea of inflation…..kind of makes me a little skeptical !!
Thanks,
Aamer
November 29, 2016 @ 11:21 am traderscott
I’m not sure that everyone is sold on inflation, but I am. It’s not going to be a straight line up. Deflationary forces are still strong, but my view is intact about 2016 being the secular bottom. In the very big picture, itwill be lower bond prices and higher stocks and commodities. But getting there will be very volatile,
November 29, 2016 @ 6:13 pm Aamer
I am too conflicted on this and will have to wait to get a better view .Interestingly the two chaps who wrote about deflation as a secular theme in the early 80’s – Gary schilling and kiril sokoloff…..now stand on opposite poles . Schilling still believes in the deflationary view whereas sokoloff shares your view.
Think that this will be a classic case of listening to the mkt as opposed to taking a big picture macro view. And agree that mkts will be volatile as mkt swings between these 2 views.
And hopefully I will be getting indications from your blog !!!
Thank you,
Aamer
November 30, 2016 @ 1:11 pm traderscott
To Schilling’s credit, he did a great job with his bond bullishness for a long time, but I believe he is now not so certain anymore.
November 29, 2016 @ 3:52 pm traderscott
And good job on your TLT trade Aamer. I don’t know your time frame, but if it’s a short term trade, don’t ignore partial profits.
November 29, 2016 @ 6:05 pm Aamer
Yes….this is a ST trade and will be taking profits soon. Mkts are too volatile currently and this is a non core trade for me.
Am looking to short EU bond mkts but need more confidence and a catalyst. Think that it is a better risk reward set up.
Best,
Aamer
November 29, 2016 @ 6:43 pm traderscott
Aamer I’m proud of you that you waited patiently, and then you stepped up to the plate in a great area and went long bonds – even though you are bearish longer term?. No matter, good job. People were way too freaked about a bond crash last week. The time to get freaked was the opposite – when prices re-tested the buying climax area and “broke out to new highs”.