Tuesday , 15 October 2024

These 5 Trends Suggest It Is Time to Short Bonds NOW!

As the fiscal cliff is nearing with the end of 2012 in sight and total public debt approaching the debt limit of $16.4 trillion, investors need to seriously start worrying about the U.S. bond market. [Below are 5 trends that support that view.] Words: 599

So says Katchum (http://katchum.blogspot.ca) in edited excerpts from his original article* posted under the title Short Bonds Now!

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), may have edited the article below to some degree for length and clarity – see Editor’s Note at the bottom of the page for details. This paragraph must be included in any article re-posting to avoid copyright infringement.

Katchum goes on to say, in part:

Technically, the bond yields on the 10 year treasury notes are bottoming out. We could see bond yields rising and bond prices collapsing….[based on the following trends].

30-year Fixed Mortgage Rate Trend Suggests…

Aside from the rising debt and the fiscal cliff we should note first that 30 year fixed mortgage rates have hit a new high of 3.5% and are, on average, at 3.4%. As bond yields follow the mortgage rates closely I expect bond yields to go up too.

 

Chart 1: 10 year U.S. bond yield

 

Open Interest Trend Suggests…

Further evidence of a coming bear market in U.S. bonds can be found on the open interest front. Historically, when commercials are net short the bonds, bond prices will show weakness going further. This can be seen on Chart 1 versus Chart 2. When the bond yields go down on Chart 1, the net open interest will tend to go to the short side (red curve goes downwards on Chart 2). At the same time, when bond yields go up, the net open interest will go to the long side or upwards. The only time this correlation didn’t hold up was during the economic crisis of 2008 where bond yields were artificially suppressed.

Who in the world is currently reading this article along with you? Click here

As we see today, the short interest is at a record high (red curve on Chart 2 makes a dip). If we see the red curve move upwards, while commercials start to get long treasuries, we will see U.S. bond yields go up.

 

Chart 2: Commercial net exposure (long = +, short = -)

 

Non-commercial Open Interest Trend Suggests….

Likewise, we can analyse the non-commercial open interest, which is actually the opposite of the commercial  open interest. The speculative long exposure to 10 year treasuries is at an all time high of 170000 net contracts. This indicates to me that we are approaching ” bond bubble” territory, especially at these low yields.

 

Chart 3: Non-Commercial net exposure (long = +, short = -)

 

U.S. Stock Market Trend Suggests…

There is a good chance that we will see decoupling. The stock market is already showing significant weakness, shedding 10% in a few weeks due to an overvaluation/outperformance in the U.S. stock market, the U.S. bond market is overcrowded and is likely to fall, and the U.S. dollar cannot stay strong as QE3 is about to start, in order to put a cap on rising mortgage rates and bond yields.

Sign up HERE to receive munKNEE.com’s unique newsletter, Your Daily Intelligence Report. It’s FREE and…
  • contains the “best of the best” financial, economic and investment articles that can be found on the internet
  • presented in an “edited excerpts format” to provide brevity and clarity of content to ensure you a fast and easy read.
  • Stop wasting time searching the internet looking for articles worth reading. We do it for you and bring them to you each day.
  • Sign up HERE to begin receiving your newsletter starting tomorrow.

Federal Reserve Balance Sheet Trend Suggests…

The Federal Reserve did not execute QE3 as promised in the month October 2012 as can be seen on Chart 4 (the balance sheet’s assets remain flat) but, considering the weakness in the stock market, bond market and mortgage market, we could soon see the Federal Reserve jump starting the printing presses.

Chart 4: Federal Reserve Balance Sheet

Moreover, do not forget that Operation Twist II is ending at the end of December, 2012. From then on, the Federal Reserve needs to buy U.S. Treasuries outright and then we will see their balance sheet expand while the U.S. dollar devalues.

Conclusion

Investors can prepare for a bear market in bonds considering all the evidence I pointed out above. I don’t recommend shorting bonds via ETF’s. Instead, it’s better to go for the gold trade as the Dow/Gold ratio is quickly declining at this moment. Historically, gold and treasuries go the opposite ways.

*http://katchum.blogspot.ca/2012/11/short-bonds-now.html

Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

Related Articles:

1. Believe It or Not: U.S. Treasuries Could Be Best Performing Asset Class in the Next 1-2 Years – Here’s Why It’s Quite Possible

investing-bonds

Could U.S. Treasuries be the best performing asset class of the next one-two years? It’s quite possible. I am sure this article is bound to stir up controversy, but I’d like to spend some time analyzing several drivers that could buoy bond prices in the coming months. Words: 1053

2. Marc Faber Bearish On ALL Asset Classes (Including Gold)!

investing4

I consider Dr. Marc Faber [to be] one of the best and well read economists in the world….[A] historical analysis of Dr. Faber’s views…[shows] that he has been spot on most of the time, not exactly always on the timing, but surely on the trend of asset classes and the economy and, currently, he is bearish on almost ALL asset classes, including gold, [and I agree. Below are my reasons for being bearish in the near term.] Words: 880

3. What is the Best Way to Inflation-Proof Your Portfolio? Here are the Options and Recommendations

inflation

With investors concerned about inflation it begs the following questions: “What is the best way to attempt to inflation-proof ones’ portfolios? Buy TIPS? Short Treasury bonds? Stocks? Real Estate? Commodities? Gold? Currencies?…[In this article we review each option and come to a conclusion as to how best to hedge the risk of inflation.] Words: 1672

4. Gross: A Continuation of U.S. “Fiscal Gap” Suggests Shorting Bonds & Owning Gold Could Produce Major Returns – Here’s Why

mind the gap

The U.S. is one of the worst debt ‘offenders’ in the world [and, as such, unless] dramatic spending cuts and tax increases [are undertaken within the next 5 years,] America’s debt/GDP ratio will continue to rise, the Fed will print money to pay for the deficiency, inflation will follow, the dollar will inevitably decline, bonds will be burned to a crisp, and only gold and real assets will thrive. [Here’s why.] Words: 674

5. Dr. Nu Yu’s View of Stock Markets, Gold/Silver, Crude Oil, USD & US Treasury Bond

investing4

Last week the gold index broke to the upside from the 12-week trading range between 1550 and 1630. It is a bullish sign for gold. Now gold is going to test the upper boundary of the 12-month Descending Triangle pattern. If prices are able to further break through the upper boundary of the triangle, gold could become intermediate-term bullish.

6. Negative Interest Rates Becoming More Prevalent – Here’s Why You Should Be Concerned

Interest-Rates

The once unthinkable might become policy: negative nominal interest rates. Investors should care as they may be increasingly punished for not taking risks yet masochistic investors believe they may be the prudent ones given the risks lurking in the markets. What are investors to do, and what are the implications for the U.S. dollar and currencies? Words: 779