Time to Talk Bonds Again

Over the years we’ve made a pretty big deal about how the herds get put off sides in bonds prior to macro cycle changes.

  • The 2008 deflationary event put ’em all in on long-term Treasury bonds prior to the whopper of an inflation that Bernanke brewed up. A massive rise in yields followed.
  • The Q1 2011 inflation trade climax took ’em all out as the Continuum (30yr bond yield) hit the limiter and “Bond King” Bill Gross made headlines (and a  reputation around here as a contrary indicator) with his media-trumpeted short of the long bond (expecting yields to continue rising) at exactly the time to have been buying the long bond (and expecting a top in yields). A massive decline in yields followed.


  • 2013 was the “Great Promotion Rotation” concocted by Wall Street and associated media that featured the pitch of a new bond bear market that would rotate all that displaced money into stocks. A massive decline in yields followed as the bond bull resumed.
  • In 2016 we were going the other way, with the global NIRP (negative interest rates) hysteria making the headlines and driving ’em all in to the big bond mania. A long and grinding rise in yields that climaxed, at least temporarily, in Q4 2018 followed.

And here we are today with casino patrons having forgotten what just a half year ago was an ongoing BOND BEAR MARKET!!! hysteria. Gross, Dalio and I believe Gundlach were front and center calling the new bond bear. Well, as the chart above makes clear it was the same shit, different day and contrarians could set their watches by it.

Sticking with the long bond, here is its sentiment structure as the bond booms and the yield drops. Public optimism (courtesy Sentimentrader) is not a killer yet, but the public is sucking on the same play that it reviled in Q4 2018.

30 year bond optix

As for the Commitments of Traders (courtesy of CotBase), the situation in bonds can be a little erratic (for instance, the 30yr and 10yr do not necessarily line up well) for reasons I assume are due to the pros playing complex bets off of each other and off of different asset holdings, not to mention whatever jiggering the Fed is in there doing (I am using highly technical terminology, I know) with its REPO, SOMA and OMO. But the little guy in the bottom panel is bullish to the extent that he was bearish back in Q4 and to me, that means something. And it’s not good for bonds.

30 year bond cot

So what will one day be once again bad for bonds (rising yields) will probably be indicative of the coming inflation. The Vampire is being invited into the house and his fellow (global economic) blood suckers will also be invited into their respective houses as the ongoing asset mania weakens.

Today it looks like they are trying to dial up the bounce we’ve been expecting in the stock market. But long-term bonds above have gone risk off and short-term bonds below indicate much danger for the stock market, if the last two major historicals prove to be good scouts for the future.

2 year yield, spx, fed funds

The Fed Funds rate is now officially and significantly lagging the 2yr yield to the downside just as it did at the 2000 and 2007 stock market tops.

We should let first things be first, and the first thing is for this bearish phase in cyclical asset markets to play out (or be negated by a miracle rally like those that this bull market has been famous for) and the second phase, as would be indicated by a bottom and upturn in long-term Treasury yields, would be the inflationary effects of whatever policy actions lay ahead.

Assuming the yield curve is due to steepen under such pressure, gold should signal the inflation well in advance. But for now it’s risk ‘off’ as the invitations to inflate once again are being sent out in the form of the new mini-mania in bonds. Let’s see how the market bounce plays out and go from there, keeping the above-noted dynamics in bonds in mind.

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