Tuesday, May 5, 2015

Bond Carnage Continues

Wow.  This kind of massacre in the global bond market hasn't been seen since 2013.  We have the German Bund going from 5 bps to 52 bps in a couple of weeks.  It has been absolute panic selling in the Bunds for 4 straight days.  We are now right back near the end of 2014 levels, which also happens to be where the Treasuries are trading now (2.18% 10 year).  There is no denying that the stock market cannot go up when bonds are going down like this.  Yes, in 2013 stocks went up despite a weak bond market, but that was when the S&P was at 1650, not 2100.

This equity market is not strong enough to overcome such bond weakness, especially now that the equities are tied to the bond market via debt-fueled stock buybacks.

What is a bit baffling about this bond move is that economic data has not been coming in strong, but the positioning in the Wall St. community was too long and that is quickly being unwound.  I am getting a sense that most institutional investors believe bonds are overvalued, and stocks are less overvalued.  I believe it is the other way around, because there is a huge demand for bonds that is built into the central bank led financial system now, and it cannot go away for fear of weeks like this, when there is no bid for bonds.

Now we are right around the 200 day MA line from 10 years, at 2.19%, and that should provide some support for bonds, and I am a buyer at these levels, looking for a move back down over the rest of May.  If the 10 year yields can stay below 2.25% over the next few days, there should be a move back down to 2.00% later this month.
I am neutral on stocks, and getting interested in perhaps taking a look at a crude oil short sometime soon.  Brent crude oil will have a very hard time busting $70.  It is trading at $67.60 as I write this.


Ivanovich71 said...

Perhaps payrolls offers the pivot point for getting back into the bond sea.

Market Owl said...

Perhaps. But usually when bonds selloff ahead of nonfarm payrolls, they rally on the report. Not always, but probably 70% of the time.