Wednesday, May 13, 2015

Bund Baby Bund

It is all about the Bunds.  It is taking over the global bond market, which is in turn making equity traders nervous.  The S&P has hardly moved down, but it seems like everyone on TV is worried about a possible rate squeeze like 2013.  I don't see that happening, because this time, it is Bunds, not Treasuries leading the down move.

And unlike Treasuries, there just isn't enough Bund supply considering ECB QE to generate a true bear market from these levels.  It like hoping for JGBs to start trading like Treasuries.  It just won't happen.  Europe is now stuck below the zero bound, and it has no lift.  There is no way Draghi cuts back on QE anytime before its due date.  So you are getting this move due to bad positioning among bond traders, the fundamentals are irrelevant at the moment.

These days, the trading in the equities has been quite boring, as all the action has been in bonds.  The Eurostoxx is having a tough time with the double whammy of a stronger euro and rising government bond yields.  All the inflows from the investment community came just in time to form a generational top.  I still believe that the S&P will be the least hurt in the next bear market.  The majority of the carnage will be in emerging markets, Japan and Europe.  That also happens to be where all the hot money flows are currently going towards.

It is back to the short anything but America theme.  I am still waiting for the exquisite short opportunity.  It should present itself on the next rally out of China and Europe, probably this summer.

For Treasuries, I will be looking to buy dips down towards 2.30% 10 yr yields, and sell the rips towards 2.18%.  That should coincide with a Bund range of 78 bps on the upside, and 60 bps on the down side.

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