The Biggest Pain-Trade? - Bearish Bond Belief At 20-Year Extremes

Tyler Durden's picture


Jeff Gundlach recently warned that the trade that could inflict the most pain to the most people is a significant move down in yields (and potential bull flattening to the yield curve). Citi's FX Technicals group laid out numerous reasons why this is entirely possible (technically and fundamentally) but despite this, investors remain entirely enamored with stocks and, as the following chart shows, Treasury Bond sentiment now stands at 20-year extremes of bearishness.



(h/t @Not_Jim_Cramer )

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Sun, 01/19/2014 - 19:23 | 4346865 Jam Akin
Jam Akin's picture

There are indeed lots of reasons why this could come to pass.


Sun, 01/19/2014 - 19:38 | 4346894 aVileRat
aVileRat's picture

May have something to do with the Chinese GDP numbers and 2H14.


Sun, 01/19/2014 - 19:46 | 4346909 Cult_of_Reason
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Bond yields are now higher than stock dividends. The relative value offered by bonds over stocks has widened significantly.

Sun, 01/19/2014 - 19:53 | 4346933 disabledvet
disabledvet's picture

the HK dollar is pegged to the US dollar. If that peg is broken (HK dollar devalued) you'll see a mad rush for not just gold.

Sun, 01/19/2014 - 20:13 | 4346964 Cult_of_Reason
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Usually those devaluations happen overnight without any prior warning. It will be too late to rush for anything after the fact. The price of gold in HK dollars will spike up instantaneously in milliseconds after the announcement.

Sun, 01/19/2014 - 21:21 | 4347121 InjectTheVenom
InjectTheVenom's picture

at this point, i'd invest in a Casey Anthony-run daycare center before i invested a penny in a UST long-term

Sun, 01/19/2014 - 20:15 | 4346971 frankTHE COIN
frankTHE COIN's picture

+1 . Thanks for the info.

Sun, 01/19/2014 - 20:33 | 4347005 Yancey Ward
Yancey Ward's picture

Ah, but don't you get it, corporate profits and dividends are about to double from here from all time highs to all time highs thus justifying nosebleed valuations.  In fact, the next major change of  step by the Fed will be to buy stocks.

Sun, 01/19/2014 - 19:44 | 4346904 knukles
knukles's picture

El deck-o is el stacked-o for some really really bad negative downright dismal way the Uknowwhat below consensus and whisper number numbers.
Surprise surprise!
And all that there money just sittin' earning squalooch on the banks balance sheets that nobody but the worst credits wanna borrow.
Hear that liquidity!!!!!!!!!!!!!!

slosh slosh slosh


Gonna be a the Sequel to the Flight to Quality All Over Again, Part 2

Here today gone tomorrow.
You won't have the progressive to kick around anymore.
Well, for a few days, at least

Hell, I'm still waiting for those phenomenal 4th quarter holiday retail sales numbers nobody's talkin' about.
Remember in past years within hours HOURS! the Federation of Golly Gee Wiz Trackers of All Thaings Consumer had all the hard data from the credit card companies, etc, etc, etc?
Must be a programming glitch caused by DH&HS and Accenture.


Sun, 01/19/2014 - 19:39 | 4346903 wisehiney
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ZH gets a donation if this happens, and drinks on me at the local watering hole.

Sun, 01/19/2014 - 19:59 | 4346938 Professorlocknload
Professorlocknload's picture

No shit? You mean there's two of us long the 10?

Sun, 01/19/2014 - 20:15 | 4346970 wisehiney
wisehiney's picture

Even a blind squirrel........

Sun, 01/19/2014 - 20:29 | 4346994 Yancey Ward
Yancey Ward's picture

Gets hit by a car?

Sun, 01/19/2014 - 20:44 | 4347022 wisehiney
wisehiney's picture

Even a blind, squashed squirrel.......

Sun, 01/19/2014 - 20:56 | 4347060 wallstreetapost...
wallstreetaposteriori's picture

Huh... I must be the only person long the 30 year just below 4%...  figuring all that duration and convexity has to come back the "other way" at some point..

Sun, 01/19/2014 - 19:44 | 4346914 buzzsaw99
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may the ny fixed income desks stew in the fetid excrement they have made of the once proud bond market

Sun, 01/19/2014 - 20:03 | 4346942 FieldingMellish
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At this point its pretty much a fixed income desk (singular).

Sun, 01/19/2014 - 20:19 | 4346977 ebworthen
ebworthen's picture

Who I feel sorry for is retirees and working people who have their money trapped in the equities casino.

The 401K/IRA  and Jiim Cramer crowd, who are going to get pummeled once again after the insiders take profits.

Sun, 01/19/2014 - 20:25 | 4346984 jballz
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ZIRP 4EVA bitchez,

you'll take nothing and like it.

Sun, 01/19/2014 - 20:30 | 4346998 Pool Shark
Pool Shark's picture



Yeah, that 0.85% "High-Yield" savings account is looking pretty good...


Sun, 01/19/2014 - 20:34 | 4347003 JamesBond
JamesBond's picture

this chart is correlated to sun spot activity



Sun, 01/19/2014 - 20:34 | 4347004 Loanman26
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When the 1.3 million unemployed come out of the unemployment rate

in the next NFP report, the 6.50% Bernanke target will be nearly met. The Bernank

will be scrambling as to why he needs to lower his target to 5.50%.

We've seen too many times when there are too many people on one side of the boat,

the boat usually tips.

Keep the presses going 24/7.

What is the opposite of taper?

My call is that we are going down to 2.35%on the 10.

Party on Garth!!

Sun, 01/19/2014 - 21:06 | 4347091 OC Sure
OC Sure's picture

It won't be painful for those who are already long and its not too late to buy now or keep adding. The long end is entering its 4th up week and i'd look for this run to go 7 to 10 weeks. For the 30yr nearby, the first major resistance comes in around 134. It would be awesome to see it met with lots of put buying; ultimate test is that line through the 2012 and 2013 highs.

When the news comes out explaining the cause of the run, most of the run will be over.

Sun, 01/19/2014 - 21:41 | 4347156 Blopper
Blopper's picture

After following the stock market for a while, I realize there is persistent misinformation of this and that going around. For example, lower yield is considered the most painful. Care to tell me how painful and why is it painful?

Because from what I know lower yield means bondholders will have gains. It means mortgage holders will have lower debt obligations. It means government debt gets more manageable. Bondholders have no pain. Mortgage holders have no pain. The government has no pain. So who is in pain when the yield goes down?

Misinformation and piles of bullshit misinformation by almost everyone.

Sun, 01/19/2014 - 21:54 | 4347192 wisehiney
wisehiney's picture

You will soon hear the screams of the hordes of t-bonds shorts. Keep studying.

Sun, 01/19/2014 - 22:09 | 4347220 OC Sure
OC Sure's picture

The gist of the article is just to say that if market participants are expecting higher rates and positioning themselves accordingly, then they are in for a surprise which could be quite painful depending on how they may have to unwind those positions. The sentiment in the bond market (extreme bearishness) is the other side of the coin related to equities sentiment (extremely bullish).

The article is referring to being on the wrong side of the trade and not really the benefits of servicing debt at lower rates.

This is not a healthy economy, though. Saving is discouraged. Investing related to real capital formation does not come from savings, instead it comes from controlling the price of interest rates and printing money. Not good.

Sun, 01/19/2014 - 22:18 | 4347244 Blopper
Blopper's picture

Thanks for the explanation, OC Sure.

Sun, 01/19/2014 - 22:30 | 4347264 OC Sure
OC Sure's picture

You're welcome.

Sun, 01/19/2014 - 21:58 | 4347200 wisehiney
wisehiney's picture

Watch for the old head fake before the pain begins.

Mon, 01/20/2014 - 10:18 | 4347926 OC Sure
OC Sure's picture

I think you may be right.  A throwback to around 3.85% looks probable. Accompanied by what, a poke to new highs for the S&P?

Mon, 01/20/2014 - 21:48 | 4350084 OC Sure
OC Sure's picture

I really do think you are on to it here. Here comes the headfake.

If today's highs in the 30yr hold (131.20) and todays lows hold for the S&P futures, then a poke up to at least 1860 is inevitable at a minimum. Aside from the reduced open interest into Fridays close for the 30 yr on lighter volume and a second week in a row of the C/P ratio over 1.25, what gets me on this is the S&P futures. That tiny W pattern for the last 15 days looks like it is just bucking to Bull up. The right thrust down on Jan 13 is much higher volume and at a lower level then the left side of the W's thrust down on Jan 6th...

Sun, 01/19/2014 - 21:59 | 4347204 eddiebe
eddiebe's picture

"When interest rates are low, stocks will grow."

                                                           Old wall-street saying.

Mon, 01/20/2014 - 06:45 | 4347686 SuperCycleBear
SuperCycleBear's picture

Remember bonds represent one thing and one thing only - future ability of the Federal government to tax either income or wealth. If private income or asset markets are unable to shoulder that burden, the real value of debt will decline as that is the only way the US Government would avoid default.


Thinking bonds are default risk free and thus their 'true' price only an average of the cash rate or funding rate for their term, is a mistake.

Tue, 01/21/2014 - 01:50 | 4350711 shawnmike
shawnmike's picture

Usually those devaluations happen overnight without any prior warning. It will be too late to rush for anything after the fact. The price of gold in HK dollars will spike up instantaneously in milliseconds after the announcement.

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