Wednesday, August 20, 2014

Bonds Look Topped Out

After an emotional blowoff top on Friday, where the 10 year Treasury yield got to 2.31%, and Bunds below 1% yield, we are selling off.  I am getting strong feelings that bonds will now be entering a bearish phase, and yields should slowly rise from here till early next year.

I was bullish on bonds earlier in the year, but got less bullish once we hit around 2.5% in May, and have been kind of neutral since.  Now I am getting bearish on bonds because the sentiment has taken a 180 degree turn.  Also, we are nearing the end of the bond buying, which means natural buyers need to support Treasuries here.  It is almost the perfect storm for a bond selloff, which fits with my view that the stock market will continue to grind higher to 2100.

I know I have stated previously that it is better to be long financial assets rather than be short them.  With the Fed doing QE and with lots of money chasing stocks and bonds.  But QE is almost over.  And although shorting bonds is an uphill battle now with the upward sloping yield curve and negative carry, the potential for a interest rate reversal higher is much greater than any negative carry headwinds, IMO.

As for stocks, we have accomplished what bull markets do.  They scare out investors with geopolitics and spooky headlines, which have very little fundamental effect, and march back higher.  All we have done this July and August is get traders beared up while the market is chopping around at the same place that it was in early July.  Yet bearishness is definitely higher.  This market should blast through 2000 milestone with ease.

It is still a BTFD market.  Still.

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