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The Crazy Man's Guide To The Bond Market
Submitted by Jared Dalian, The 10th Man, via Mauldin Economics,
I invite you to inspect the following chart of 10-year interest rates in the US.
If you don’t have a lot of experience with these things, let me clue you in: This is a very scary-looking chart. It’s a classic head-and-shoulders bottom in yields.

If you’re one of those people who’s scornful of technical analysis, don’t be. Now, I don’t pay much attention to complicated stuff like Elliott Wave or Gann Angles, but there are some very basic technical formations that work reliably most of the time.
I had the good fortune of taking out a mortgage when 10-year rates were at 1.9%, which goes to show that the only time you get to top-tick stuff is by accident.
Now, this is actually not the low in yields. 10-year yields got to 1.4% a few years ago.

Of course, interest rates are even lower in Europe. Take Germany, for example:

I think that these interest rates (which are at 700-year lows in Europe) signify a bubble. Other people don’t, though—they point to x, y, and z as signs of deflation.
I’m very weary of the inflation/deflation argument. A lot of people lost a lot of money betting on inflation when there were obvious signs of inflation (QE). And I fear that a lot of people will lose a lot of money betting on deflation when there are obvious signs of deflation.
I’m a trader at heart, and I try not to get too attached to my views. I pay attention to price. And right now, the price action is telling me that the bond market might be in trouble.
Central Banks Buy High and Sell Low
The first thing you need to know about central banks is that they are the worst traders in the world. The worst.
Probably the most famous example in the modern era was the Bank of England under Gordon Brown’s leadership puking its gold holdings—on the absolute lows, between 1999 and 2002. The idea was they had this gold sitting there not generating any yield, so why not sell the gold and buy paper that would generate some yield?
Whoops…

A less famous example of bad trading by public officials would be the US Treasury’s decision to issue floating-rate debt. Now, if the government has floating-rate liabilities, it should want interest rates to stay low, right?
Whoops…

The all-time lows in rates. To the exact day.
So with all this in mind, don’t you think it’s interesting that the ECB is going to buy European debt—at 700-year-low yields? At negative yields, in some cases?
Central banks do not buy things on the lows. They buy things on the highs.
Of course, the ECB is not trying to make money on these transactions. Which is the whole point!
The Worst Investors in US History Strike Again
Betting on the end of what is a 30-year interest rate cycle is not a productive use of our time. This bond market has claimed the careers of many investors. It reportedly hastened the retirement of Stan Druckenmiller, arguably the greatest investor of all time, who bet against bonds heavily, thinking yields could not go any lower. They did.
Let me impart some wisdom here: The first rule of finance is that there are no rules in finance. Nothing works all the time. My favorite dumb rule of finance is the one that says your percentage allocation in bonds should be equal to your age. So if you are 60, you should be 60% in bonds.
My guess is that if interest rates rise 2%-3%, people won’t be saying that anymore.
You know what I worry about? I worry about the baby boomers. I worry about this generation, the worst investors in US history, who got carried out in the tech bear market in 2000 and got caned in the financial crisis of 2008, and after having been hammered twice in the span of 10 years in the stock market, went all-in on bonds.
Why? Bonds are safe. Everyone knows stocks are not safe.
Now, in retirement, none of these people expect their bond mutual funds to get cut in half, which would happen if interest rates went up about 3%-5%.
Imagine if they did!
The disclaimer to all of this is that I’ve been a bond bear for many years, and I’ve been wrong. But for the first time, I think we have something approaching consensus that yields will stay low forever. People who think interest rates are going up are starting to sound crazy. I am starting to sound crazy. That probably means I’m close to being right.
If 10-year rates get above 3%, the previous high, we will know for sure. If that happens, pick up the Batphone, call the White House, sell everything. Why?
If you are still ignoring charts when they are making higher lows and higher highs, God help you.
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"That probably means I’m close to being right." Or not.
When you are playing with other peoples money and you can print more it changes the rules of the game.
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com
Get lost, you Shill.
if 10 yr rates approach 3 percent there will be massive fed intervention, just like last fall.
did you not observe? markets are not free market driven marketplaces(anymore).
just sayin.
I had better fortune paying off my mortgage.
Congrats.. must feel pretty good to have been born into a generation where this was still possible (on average).
But hey, two generations ago, my grandfather was wiring telegraph cables as a single earner, the mortgage was paid off, and he retired by 55. Good luck with that today.
Is it just me or is gold as a relic really getting pissed off at all this disrepect?
Glad you told me that was "head and shoulders."
I thought it was suave, or prell, or lady clairol.
Didju know that a lotta them products on the high end contain "placenta"?
Yup, you read that right, tiger!
(Swami.... you one sick puppy. Maybe they bunk us together. We'll at least die laughing)
If central banks buy high, they can just buy higher. Author, I think, assumes CBs don't affect the price.
Is he saying, just saying..?.at least he is honest
When 99% of people doubt your idea, you're either gravely wrong or about to make history." -Scott Belsky
The dollar is debt.
I agree...why hold debt when dollars are surging?
And indeed equities are acting winded.
Do I wish I'd bought Ford when it was under a dollar a share?
Sure.
I've said I'm being greedy with this treasury bet...sold off hard when taper was announced. Then they rallied in a big way.
For some reason people find that "inexplicable."
Yet everyday we report on how this recovery simply refuses to launch...and now all the "hard money" folk have come out to complain about...you guessed it...hard money.
My interpration of that is that what folks ACTUALLY mean is that we really don't have a recovery...perhaps even in our personal lives...but we're to "manly" to admit to that.
So we "blame" the money.
Sure is easier I agree with that.
Right now tho the money would appear to be blaming us.
"And for that we have faith."
Church on Sunday...market on Monday. "We are all sinners in the eye of the Moullah."
godawful analysis
1) Bond ETF's are not bonds.
2) Treasury issued TIPS becuase yeilds were at an all time low, not in spite of.
3) Short duration bonds may suffer yield in a rising interest rate environment, but not principle (unlike Bond ETFs).
4) Bond bears who protect their principle in short term bonds (not ETF's) could do a lot worse, a lot worse.
>>>
The first thing you need to know about central banks is that they are the worst traders in the world. The worst
<<<
Disagree.
Worst is retail.
Watson
That was a nice read. Thanks for the article. ;-)
Tyler has been stepping things up lately. ( from a technical perspective)
It must be some sort of "cognitive intuition" surfacing from the abuses suffered over the last 6+ years. What ever it is, I like it!
For what it's worth... The ECB doesn't have enough inventory to buy, based on the -20 basis points cap/yield.
The European banks were NEVER recapitalized after the GFC. That debt is still on the books. Spain,Italy & Eventually France are next.
A group of self appointed technocrats are trying to use debt for TOTAL sovereign control of western Europe.( they're playing " the waiting game")
Kinda smells of Japan fiscal policy, doesn't it? Print and pretend it doesn't exist.
so close - i tend to agree with him, but what i think is the situation, 'this time it is different'. because thanks to computers, they aren't printing 'paper money'. they are printing zeros. and the zeros do not get into people hands. they just go into the reserve fund of banks, until the banks buy stocks. the paper money then only gets onto the street when mr. wall street big guy needs his shoes shined.
this has never happened before. never. nothing like it. nothing like negative interest rates. they inverted 'usury'.
usury = they charged you sinful amounts of money to borrow money.
now - they inverted. it is brilliant
nirp - (negative interest rate policy) - they charge YOU to lend them your money.
and - since some people want 'save' and are risk averse, they are going to just slowly keep sucking your account into theirs.
please - if you 'get' this - i will take an up arrow, because i don't think many people see what they have done.
Another idiot that doesn't get it.
The head & shoulders pattern is not a convincing one, you can sort of make it out! What's more convincing is the retest of previous lows and now it broken through those levels. notice small inflection point as the last leg up passed through that resistance level.
on fundamental side, the chart confirms the possibility that ECB buying has cleared the shelves.
the Central bank prints money, doesn't care to make money
so, the author is saying: rates rise is really coming?
or
the market will eventually believe the FED jawbone about a coming rate rise so much it will act as if it really will happen? the Pavlovian dog option
I still have strong doubts about possibilty one.
but the second possibility, hmm, the second possibility I'm quite willing to entertain.
Honestly, you put the Bund chart right below the ten yr chart, and you honestly think the US bond market is going to look any different? Bond bears are insane and this will only end when the majo reset default comes, thats it, otherwise, same as it always is, even if FED raises Fed Funds, short rates will rise FF to 5yrs but over 5 to 30 yrs will be capped, because the dollar will continue to get strong and if the FED raises, even stronger and with everyone and their mother short dollars, well good luck!