Friday, September 12, 2014

Bond Crush

There is something that we haven't seen in quite a while, and that is a long squeeze in the bond market.  As I mentioned previously, I don't believe bonds are a good place to put your money any longer.  We've reached the point where German Bund 10 yr. yields are struggling to go lower, having reached sub 1% there, and with QE almost down to a trickle, there is much less demand coming from the biggest buyer over the past 5 years.

The Treasury market is now on its own, without QE, you will have more of these spastic selloffs that extend for much longer than we're used to in a QE world.  Plus the fear of being long bonds ahead of forecast Fed rate hikes next year is getting more real, as we get closer to launch off on hikes.

However, I am always very hesitant to be short bonds at anytime, with the drip drip nature of negative carry and my long term view that the US economy will weaken again like the rest of the world.

Stocks are going to feel some of the effects of the higher interest rates, but unless we get a huge bond selloff to 3% on the 10 year, I don't expect that to have much of an effect on stocks.  Stocks are in their own world, with money flows coming from fixed income as TINA (there is no alternative) comes into play.  Plus the bubble aspects of higher prices begetting higher prices are in full motion.  The strongest market in the world, the S&P 500, will likely the be last man standing before a new down cycle begins.

Short term, there is a lot of angst about possible change in Fed language at the upcoming FOMC meeting.  Don't bet on Yellen feeding the bond bears this time, because last month's job numbers probably have them frozen in their tracks for the time being.  But it seems like there will be a change in language in October or December meeting.  Still looking to BTFD a bit lower from here.  Seems like we'll grind higher once all the dust settles after the FOMC meeting and after the Alibaba IPO.

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