Wednesday, June 4, 2014

Bond Bulls Ambushed

Last week, we had the 10 year yield spike down to 2.40%, on really nothing.  It was a scary moment for Treasury shorts.  While we have been lulled to sleep by the low volatility in all asset classes, the recent movement in Treasuries defies the low volatility trend.  Now we are pushing up close to 2.60% on the 10 year, all in less than a week of trading.

When Dennis Gartman came out on CNBC last week giving out the the old saw about there not being enough bonds for the pension funds, about how bonds will go up, I knew my bond short position was safe.  I covered the rest of my short yesterday.  Understandably, the sentiment got lopsided on the way down in yields.  The bond market looked indestructible over the past few weeks, especially last week, when they were strong despite a strong equity market.  When even Gartman becomes a bond bull, and he hardly ever mentions them, the up move is pretty much over.

We should consolidate at these lower levels over the next few days.  A fair amount of the selling in bonds was front running a probable strong nonfarm payrolls report and an unwinding of month end price markups higher in bonds.

Despite the climactic top last week, I am still bullish on bonds over the coming weeks, now that we are flushing out the weak hands here.  The 2.63-2.65% 10 year level is a spot that I will use to target buys in bonds.  With the economy still weaker than most think, and with Europe, Japan, and China all weak, the demand for sovereign debt will remain.  And if we ever can get equities to weaken a bit, that should put in a solid bid for bonds.   I don't want to short bonds again, especially at these levels.  It is like winning money in roulette, you can do it, but the odds are against you.

Europe has traded flat for the past 2 weeks, it is actually lagging the S&P, despite the expectation for an ECB rate cut on Thursday.  The S&P remains king.  I am expecting a very dovish Draghi on Thursday and a subsequent rally in global equities.  Best way to position is to be long ES, although I am not long yet.  Might nibble a bit long on ES before the ECB meeting.


Anonymous said...

Can u explain more clearly why dovish ECB is more bullish on SPX than European equities? Thx

Market Owl said...

I never said a dovish ECB is more bullish for SPX than European equities. Just pointing out that leading up to the ECB meeting, the SPX has been stronger.

A dovish ECB is bullish for all equities.

Anonymous said...

Sorry misunderstood. Can u recommend any ETFs or futures for Europe equities?

Market Owl said...

Futures: FESX (Eurostoxx 50) FDAX (DAX index)