Wednesday, August 27, 2014

Bunds Getting Extreme

The German Bund 10 year went below 90 bps today and has set an all-time low in yields.  The first 4 years of the German yield curve are in negative territory.  That is unheard of.  Europe is on a speed course towards Japanization of their bond market.  Only 40 more bps to go!  In the face of this kind of move, the Treasuries are naturally bid, but not as well bid as one would expect.  The Bund-Treasury 10 year spread has blown out to 145 bps.  The move higher in Bunds looks like short capitulation.  With Draghi's QE talk, the bears couldn't take it anymore and it's gone parabolic.  But the thing about QE is that it actually ends up being bearish for bonds, not bullish.  Look what happened when QE2 and QE3 started, bond yields grinded higher, not lower.  So I am bearish on Treasuries over the coming weeks.

QE is all but priced in for Europe, and IMO, there is much more room for yields in Germany to go higher than lower, especially if equities keep grinding higher, as I believe will be the case.  Even though we are entering bubble territory, we cleared out the weak hands and had the pullback that refreshes in early August.  The market should be safe for the next several days, and I expect an upward bias.  Longer term, SPX 2100 looks very doable by the end of the year.  I will not play long on this bubble, but will buy dips, because the ECB QE will keep a bid under stocks for the next few months.

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