Tuesday, May 12, 2015

Bond Panic

This is what happens in a bond panic.  Regardless of equities, bonds do their own thing.  They will selloff in big chunks, and have short squeezes in big chunks.  The short squeeze on Thursday and Friday setup the bond market for a monster selloff yesterday and into the European session today.  The Bunds are back towards 0.70% yield, and the 10 year is getting very close to what I would consider a great long term buying opportunity at 2.40% 10 year yields.  I can only play from the long side in bonds here due to the lopsided risk/reward scenario.

What is interesting about this bond selloff is that it is not due to equity strength, or strong economic news.  It is due to overly bullish positioning in bonds, especially the long bond, and Bunds.  We are quickly getting rid of the excess.  Bonds also are a lot like stocks in that they can selloff quicker than they can rally.  Of course, not to the extent of a stocks, but what you saw in 2013 is typical of what happens when bond investors panic.  You get a one way freight train of a move higher in yields, reaching the uncle point for a lot of fast money, then you consolidate for a couple of months, and then the original trend continues (lower yields).  That is what I expect to happen as we get closer to a Fed rate hike, likely in September.

This is the second cannon shot, the first one in March was a warning shot, this one is the real deal.  So I am not sanguine in believing that this is just a blip in the bond market bull trend.  This is not like the March bottom in bonds.  This will last longer, just because of the threat of a Fed rate hike keeping bond investors on their toes, reluctant to jump in with both feet.

Equities have proven that they cannot shrug off the bond selloff.  It could in 2013 because we were at much lower valuation levels, and the economy was stronger.  Now it is a struggle for equities to rally unless you get perfect conditions.  These are far from perfect conditions.


Anonymous said...

Not sure today is the day to get long bonds, definitely not go all in. Maybe in the overnight session or tomorrow we have a v bottom opp to buy. Wanna see TLT in the low 118s.

Anonymous said...

Long TMF partial


Market Owl said...

I think we already saw the V bottom. 10 year yields hit 2.35% overnight during the European session, Bunds went to 0.73%. Tomorrow is the 10 year Bund auction and the 10 year Treasury auction. Overnight seemed to be the panic selling ahead of the auctions, building in a concession.

Anonymous said...

Maybe you're right. I thought about it and so went long a little TMF. For some reason I don't have the balls to get long call on TLT this time. Maybe I'm wrong

Market Owl said...

I think we've seen the bottom in bonds for this sell cycle, look for a steady grind higher into month end. Think we hit 2.15% 10 year yields by Friday.