Don't Ask Don't Tell Bond Buyers

Yesterday we saw something that you rarely see:  an explosive rally in bonds, without Bunds forecasting it, on NO news, with a strong stock market.  To top it all off, it happened on the 1st day of the month.  Totally out of left field.  I don't think I was the only one caught off guard.  The move was a one way freight train.  Now I know some of the amateurs will say that the Turkey bomb news caused the rally.  Gimme a break.  Then why didn't stocks selloff?  That kind of news doesn't cause a 9 bps move in the long bond.

As I've stated before, when the fund managers are comfortable and acting rationally, they make fewer mistakes.  My edge comes from taking advantage of the institutions making mistakes.  And in a bull market (applies not only for stocks, but also for bonds), fund managers are feeling no heat, and make very few emotional decisions.  In a bond bull market, you get motivated buyers stepping in out of the blue, in a strong stock market, without warning, like yesterday, ahead of a nonfarm payrolls report later this week, and there just isn't enough selling force on the other side to keep it orderly.  That kind of unpredictability doesn't happen as much in a bear market.  The best trading markets are bear markets.  Obviously, that is the worst market for the institutions, who are always long.

Believe or not, this Fed rate hike is doing nothing to scare away bond investors.  The long bond has been screaming higher and when that happens, you are not going to scare away bond buyers, even those that are buying the short end ahead of a Fed rate hike.  Eventually that long end strength spreads out to the short end.  Rarely do you get short end weakness to spread out to the long end over extended periods of time.  The long bond is the general, and the shorter maturities are the troops.

In this QE world, you can only really have a sustained weak bond market when the long end is leading the way down, not the short end.  Flattenings scare nobody in the bond space.  Why?  Because rates are going to stay low, no matter what.  That is what you saw in 2014.  A flattening that was extremely bullish for bonds.  You need a bear steepening to catch the attention of the bond investors.  It happened briefly from May to June, but that was it.  That just so happens to be the high for yields this year.
Now all the bond fund managers can't put on flatteners fast enough.  It should continue for the rest of the year, as the Fed rate hike will embolden them.