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Here Comes The Pain In The Bond Market
From Nic Lenoir of ICAP
As discussed earlier this week and last week, Murphy's law is verified in the bond market as we are inching closer to 122-30 in TY futures and the 5Y future is leaning dangerously on the 100-dma, eyeing the 118-30 support below. The market is arguably still long but trimming. All the buying last week post long end supply is getting stopped out for those who did not cash in on a quick buck, and a lot of pre-FOMC positioning is getting pushed out as well. The irony? People are starting to feed the sell-off mentioning next week's supply... just when real money is about to step up and bid the market again! If you have been playing from the short side the past couple weeks you have been right. I tried to play that way mostly with more or less success catching the tops on the pullbacks (or missing them by a few ticks), and even schatz which I thought would hold up broke the 108.80 level.
However the time has come to look for support and try to cautiously think of getting long again as we reach 122-30 & 119-30 in 10Y and 5Y futures respectively. Yields have backed up quite a bit and with a few more stops to run I think bonds will be compelling enough for real money. Imagine the fun we could have early next week with 3 days of supply (and buy-back!) just ahead of the long weekend. It will probably mark the turning point. For the Bund I see 126.50 corresponding to 122-30 which is a big trend support. It is likely in terms of price action that we get a short-lived bounce toward 128 before the last flush down to that level.
Equity markets are pretty strong today reversing the recent positive correlation between bonds and stocks. For the S&P future I see 1,204/1,213 as the area where you are supposed to fade the bounce. If that resistance zone is bypassed you are supposed to play the melt up again. However if my observations on Fixed Income are right, I doubt we can see more pain there and a final flush alongside strength in equities as these type of moves tend to end up a bit disorderly which in turn has a tendancy to spoil risk appetite.
The Knight Research report that came out yesterday got a lot of press, and I must say I am quite pleased it did since it echoes all the themes I have been pushing since 2008. In terms of fundamentals the big picture is simple: the mercantilist/credit-driven global economy has reached the point of no return. US consumers (or Western consumers for that matter) can no longer borrow their lifestyle. A weaker USD means more expensive comodities with jobs and money still flowing outside of the country, and this dynamic is no longer sustainable. That is why I have called for currency wars early on, that's why we will get import taxes, and I hope it stops there. It is not a rosy picture but again the mechanics are so simple and so obviously broken that it is hard to look at things any other way. It doesn't mean financial markets and consumers will not chose to ignore it for a little while longer, but the end game is clearly in sight as Knight put it. Every day that markets rally based on China no longer hiking or Ireland being bailed out makes me feel like I am trapped in a living dead nightmare. I was hoping to wake up before GM would be allowed to crawl out of its grave, but at this pace I feel we might need to have a Bank of America buy Fannie May and Freddie Mac for every one to wake up in sweat!
Good luck trading,
Nic
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So how does Congress end up imposing tariffs on WalMart imports? -- I am missing something here.
Cool, understated style delivering killer news and views.
Stilleto writing, Mr. Nic.
GM and APPL the backbone of the US stock market.
Living dead nightmare indeed.
Grope on!
ORI
http://aadivaahan.wordpress.com
Support for the bond market.....we are testing support for the bond market...copy.
Please be aware that the bond market is on its last legs. When the bond bubble bursts it will not matter if you are holding Euros or Dollars. Paper IOUs are only backed by other paper IOUs. To take matters into your own hands....
Buy Silver.
tin foil hat on:
is it possible the fed is eating up the supply of as much short term debt out there b/c it knows it can't hold interest rates down forever and when IR do rise, it'll bankrupt the guvment over night? This way, with the fed holding the majority of shorter term duration, they can keep the ponzi going?
Yes, Yes and yes. What ever it takes to get that 36,000.
The Fed needs no assets of any kind to keep the ponzi going.
Don't quite understand the headline. Seems Nic is saying the bond market is about to rally, no?
None of this reasoning supports a plus 180 dow.
Sorry for the spam but I truly feel I've got an important new post on my site. JSM has more info on the gross overstatement of bank assets. Very, very important stuff and I copied it into my latest. Thanks for your patience.
www.tfmetalsreport.blogspot.com
Nic, just a few questions: what if the euro implodes 1st? what if China capitulates and lets the Yuan rise?
What happens to treasuries and the dollar then?
Okay, sorry, that's 2 questions.
WRONG WRONG WRONG!!!
The Fed wants a steeper yield curve for the banks to goose their profits. The rise in the long end is entirely predicatable
Equity volume on various issues in the green today is pathetic... not that volume indicators have mattered to this market in a long time. The 13% drop in volatility is unbelievable... that gap down will need to be filled at some point.
seriously. Is this a last gasp of air on the upside maybe? dollar has had a little rally, euro down a bit.....reversal time?
That's how it seems... most equities and indices couldn't even break out of their own short-term down trends today. While in $ news, DXY was able to hold short support. All we need is for Keystone AAPL to sell off into the close... lol
Beware the golden 61.8 retrace in FVZ Nick -122-30 in TY may be a tad too much of a hit to Pimco's MTM as they have been killed in Muni land
I'm not afraid. I did move allocations to the middle of the curve to lessen ir risk tho...
I like a talking stomach with the right allocations
who's fast, and thorough, and sharp as a tack.
http://www.youtube.com/watch?v=u7aDstrDMf0
Not exactly a feel good first day chart for GM. That final minute 1% ramp wasn't predictable at all, err...
Could someone pls advise on a good site or book to learn about bond market?
Also, where do you see the rates heading? will they continue to rise or is increase a temperary one before the rates will start to slide slightly lower once again?
Thanks!
Rates will, and must rise. Contrary to propaganda, the Fed does not control rates. They follow the market at the end of the day. If the bond market wants higher rates, the Fed complies.
The bond market will force Ben's hand sooner than people think.
Bifurcation across lots of correlations is what I see as the next step, i.e., a lot of the recent correlations will invert. This will be seen in financial markets and in social, economic, and political areas as well. Ten thousand people a day being kicked out of their houses - not being able to pay their bills - and COH hitting an all time high. What the heck are they keeping in their purses?
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