Submitted by Shane Obata [13]from Triggers [14]
The Name Is Bond, Long Bond
In early May of 2013, I came across a presentation by David Rosenberg called “Bernanke: The Wizard of Potemkin [15]”.
The whole thing is great but there was one slide in particular that caught my eye…
[16]
Rule #9 is especially interesting; it’s the ultimate contrarian suggestion.
Why should you care?
Because hardly anyone expects US Treasuries to outperform in 2015… and that’s exactly why they might.
In the following analysis, we’ll look at 5 reasons why the long bond might be the best trade of next year.
1) When all the experts and forecasts agree…
First, let’s take a look at two recent polls by Reuters.
1) From November 13th [17],
“the latest poll showed that…24 of 43 economists polled said the Fed will likely start raising short-term interest rates in June of next year. Seven expected an earlier start, while 11 believed the first rise will come in September or later”.
2) From November 7th [18],
“14 of 19 primary dealers said they expect the first rate hike by June 2015”.
In other words, the consensus is that rates will rise in 2015.
But let’s not forget that market participants have been expecting this for some time.
The following chart shows that the idea that “the Fed is going to raise rates in the near future” has been consistently wrong since 2009.
[19]
We’ll see if the trend continues in 2015…
Moreover, according to the Barron’s Big Money Poll [20], almost all American money managers have a negative outlook for Treasuries. The succeeding image demonstrates that 91% of respondents are bearish on US Treasuries.
[21]
It’s the perfect setup for contrarian investors.
Not to mention the fact that comparable assets don’t look so hot…
2) Relative value…
Why own US Treasuries if rates are already so low?
In comparison to other “safe haven” assets – such as German and Japanese bonds – USTs actually look pretty good. The next diagram exhibits 30 year government bond yields for: the US (orange), Germany (green), and Japan (yellow).
[22]
As you can see, the US’s 30 year yield is 78.5% higher than Germany’s and 113.3% higher than Japan’s. If there’s a flight to safety then it’s likely that US Treasury bonds will see a lot of demand.
Especially if fear returns to the markets…
3) Risk off…
The world’s central banks continue to keep rates low and to expand their balance sheets [23]. As a result, 2015 could be a good year for risk assets.
That said, what if it’s not?
From the high on September 18th, 2014 to the low on October 15th, 2014, the $SPY – the SPDR S&P 500 ETF – fell by 9.87%.
During that same period of time, from the low to the high, $TLT – the iShares 20+ year Treasury bond ETF – rose by 10.39%.
The ensuing figure displays that when investors are fearful, they often look to US Treasury Bonds (USTs) for “safety”.
[24]
If the S&P 500 sells off in 2015 then it’s likely that USTs will rally.
What’s more is that, as we noted here [25], world growth is trending down.
The subsequent graph confirms that world GDP growth peaked in late 2009.
[26]
If this persists then it’s likely that investors will move their money from risky assets – such as emerging markets stocks and bonds – to “safe” assets – such as USTs.
But will there be enough supply?..
4) Limited supply…
The Fed now owns more than 45% of all outstanding 20+ year Treasuries [27]; these securities are “off the market”.
[28]
Said another way, they’re not for sale.
In the same light, the Federal deficit is shrinking. The following chart shows that it’s been in decline since 2009.
[29]
If the deficit continues to fall then the Treasury won’t have to issue as much debt. This, in turn, will lead to a lower rate of supply of USTs. In sum, there may not be enough US Treasury bonds to go around.
But is that what the price action is telling us?..
5) Bullish technicals…
The monthly chart
The succeeding image displays that $TLT is below its late 2008 and mid 2012 peaks.
[30]
The monthly W%R is below -20; however, it appears to be turning up – which is positive.
The weekly chart
The next diagram exhibits that $TLT has been rising since late 2013.
[31]
Failing to reach -80 in the last few downturns, the W%R is indicating a positive trend.
Daily chart
The ensuing figure displays that $TLT has made a base of support at ~$118. Furthermore, an up wave that’s identical to the 2014-07-03 to 2014-08-28 rally could see the ETF move up above $128 by 2015-01-15.
[32]
The daily W%R is above -20 which indicates that $TLT could be in for more gains.
Upside levels to watch: $123.15, ~$128, ~$130.
Downside levels to watch: ~$118, ~$116.
* * *
In conclusion…
There are numerous reasons why US Treasury bonds could be in for a big 2015.
Don’t believe me? Just ask Guy Haselmann [33].
A friend once told me that he “saw many traders get carried out in body bags trying to sell Japanese Government Bonds”.
It’s possible that the same fate may await those who try to sell USTs.
