I want to share some historical work done by Sentimentrader about the current setup in Treasury bonds. A caveat is that I think ST is a little convoluted in their presentation, so I am not including the confusing aspects of the analysis. I think they mean ‘yields’ not ‘bonds’ when they talk about ‘smart’ money bets. The bets for a steepening yield curve should be toward long-term yields, not bonds, which go the other way.
Whatever the details of their data, here is the positioning in 30s and 10s as relates to the last two previous examples. Hedger positioning as a percentage of open interest is consistent with the the periods prior to the last two steepeners of the 10-2 curve.
Here’s how the 30-10 looked. The theme is the same, the longer dated bond declines vs. the shorter-dated bond or put another way, long-term yields rose in relation to shorter-term yields. i.e. a steepening curve (whether or not nominal yields were rising).
As for gold, USD and Financials, here are how each performed.
As we have been noting all along, a steepening yield curve tends to be very good for gold. The current short-term correction is what it is, a cooling off period. If the yield curve continues to steepen there would be little reason for gold bugs to worry.
The US dollar does not generally favor a steepening curve because, in my opinion, if it comes amid deflationary stress (remember, the curve can steepen under inflationary or deflationary pressure) the pressure builds on policy makers to inflict currency compromising policy and if it comes amid inflationary stress, well, that speaks for itself. Inflation is the loss of purchasing power.
As for the Financials, as we have noted the condition can see stable or rising Banks/Financials initially, but eventually they tend to succumb to broad market weakness. The question of whether a steepener is inflationary or deflationary also plays a large role here. For example, the 2006 condition saw inflationary conditions persist and rally into 2008 before the Financials crashed along with everything else (as the steepener morphed to a deflationary asset market crash).
