Wednesday, May 28, 2014

Bonds Feeding Off Last Year's Pain

The bond market refuses to go down, despite S&P 500 going to all time highs and Nasdaq and Russell trading strong again.  There was so much pain in the bond market last year, it put a big scar in the psyche of bond longs.  The market is using the pain from bond longs last year to feed the current rally, as last year's sellers have turned into this year's buyers.  With short term rates at zero, fund managers cannot hold cash, they need to put it somewhere to generate yield.  Cash is literally burning a hole in the pockets of asset managers that don't want to fall behind their benchmarks by being underinvested.

Much like the equity longs' pain in 2008 fed the rally for so long.  I expect 2013 to have been the cleansing that the bond market needed to propel it to new lows in yields.  It is a better than 50-50 chance that 10 year yield to go back to the lows that you saw in the summer of 2012, within the next 2 years.

In the short term, the Treasuries are benefiting tremendously from a front running of the ECB meeting in June 5, when most expect some type of monetary stimulus.  European sovereign bonds have been absurdly strong and that strength is spilling over to the Treasury complex.  I don't think the strength is sustainable short-term, as the tendency for these type of QE announcements that are telegraphed is a run up in bonds ahead of the event, and then a selloff a few days before and after the announcement.  It is a bit different with equities, which run up into the announcement, and stay higher for a bit longer and then start to go back down.

Based on that timing of the ECB meeting June 5, it looks very likely that the global equity markets could top anytime between June 6 to June 20, which is triple witching day.  Until June 5, the stock market will probably keep grinding higher.

4 comments:

Anonymous said...

Interesting opinion on why the big caps keep "grinding" higher:
http://www.zerohedge.com/news/2014-05-27/here-mystery-and-completely-indiscriminate-buyer-stocks-first-quarter

Market Owl said...

Yes, stock buybacks are a big factor in the endless bid. And of course QE money channel is lifting all boats, going from Treasuries to corporates and junk bonds to stocks.

Anonymous said...

How about your indicator turn bearush?

http://blogs.marketwatch.com/thetell/2014/05/27/dennis-gartman-calls-for-a-stock-market-correction-including-his-are-all-wrong/

Tony

Market Owl said...

Yes Gartman is bullish on stocks and bonds. It means we are closer to a top in stocks, but he is more of a contrarian indicator when he is against the primary trend. This time, he is with the primary trend so his signal doesn't mean as much.