A Bond Short-Squeeze Is Coming

Authored by Jesse Colombo via RealInvestmentAdvice.com,

Rising U.S. interest rates have been the main topic of discussion among financial market participants over the past several months. The mainstream narrative goes like this: “the economy is doing quite well, unemployment is low and job growth is steady, the housing market is improving, and interest rates will continue to rise to reflect this new reality.” Traders and investors have been buying this narrative hook, line, and sinker and have been dumping Treasury bonds, which has sent yields higher.

[ZH: Record speculative short positioning in rate-hike bets (ED) and rates (bonds)]

As the chart below shows, the U.S. 10 Year Treasury yield has broken above a downtrend line that goes all the way back to 1987.

10 Year Treasury Yield Breakout

Many investors and traders are viewing this as more evidence of higher future interest rates and brighter days for the economy.

While this breakout should be watched closely, there are some caveats to keep in mind: a breakout from a downtrend line doesn’t usually signal the imminent start of a bull market, but rather a change from a downtrend to a sideways trend. In addition, investors should be aware of the risk of a “head-fake” or false breakout, which is what happened in 2006 and 2007. Back then, investors believed that the economic boom was sustainable and that higher rates were inevitable, but those higher rates put an end to the U.S. housing and credit bubble, which led to a bear market in equities and a continuation of the bull market in U.S. Treasury bonds.

Interestingly, the market participants who are driving the current surge in interest rates (and falling bond prices) are considered to be the “dumb money.”

10 Year Treasury Smart Money

The chart of 10-year Treasury note futures shows that “dumb money” (large & small traders) are bearish on bonds and bullish on yields, while the “smart money” (commercial hedgers) are quite bullish on bonds and bearish on yields.

The last two times these groups positioned themselves in a similar manner, bonds rebounded and yields fell.

It’s not just the 10 Year note: the smart money is bullish on 30 Year Bonds (and bearish on yields), while the dumb money is bearish on 30 Year Bonds (and bullish on yields).

30 Year Bond Smart Money

The smart money is also bullish on 5 Year notes (and bearish on yields), while the dumb money is bearish on 5 Year notes (and bullish on yields).

5 Year Treasury Smart Money

In addition, as Lance has shown, every time U.S. 10-year Treasury yields became technically overbought in the last couple decades, it heralded a downward move:

Bond Yields Overbought

While I’m not recommending to fight the trend, I believe investors should be aware of whether they’re trading like the “dumb money” (or “the crowd”) or “smart money.” Right now, “the crowd” believes that much higher rates are inevitable because they’re ignoring the fact that our economic recovery is not as healthy as it seems and that stocks are incredibly overvalued.

“The crowd” will soon experience a rude awakening that this economic boom is not what it appears to be, which will likely cause them to seek the relative safety of Treasuries once again.


Youri Carma Scornd Sun, 02/25/2018 - 19:27 Permalink

Hyper- inflation is a totally different animal all together because it means total loss of trust in the dollar and massive dumping. Could happen but not in 2018 yet I think. I think we will see more deflation in 2018.

I think that petrodollar’s supremacy is slowly but gradually eroding but in the end it will go parabolically (hyper), as it always does because of trust, or rather lack of, in the dollar system. The dollar won’t go away but will be worth ‘Scheiße’ in the end and will be one of many other currencies not much used in world trade anymore.

btw with 'inflation' here I mean inflation trough higher money velocity (I.C. higher wages) not the devaluation of the dollar which feels like inflation for people using the dollar aka monetary inflation.

In reply to by Scornd

Bam_Man Youri Carma Sun, 02/25/2018 - 21:50 Permalink

"currencies not much used in world trade anymore."

Ding, ding, ding - give that man a cigar!

That is the truth that no one dares to speak.

NONE of these garbage fiat currencies are suitable for the purpose of settling international trade anymore.

Some countries already acknowledge this, and thus we hear the war drums beating louder and louder.

Scary times ahead. Scary, indeed.


In reply to by Youri Carma

Code Duello Scornd Sun, 02/25/2018 - 22:24 Permalink

Antal E. Fekete, a monetary scientist, has been correct about the overriding deflationary environment since at least the turn of the century.  His student, Keith Weiner (monetary-metals.com) whose work occasionally appears on ZH, has detailed essays on his website that echo/corroborate Fekete.

Without detracting from either of them, the conditions for hyperinflation in the USA are not present.  Maybe someday but not likely in the short-to-intermediate-term future.

In reply to by Scornd

taketheredpill Sun, 02/25/2018 - 18:58 Permalink


The mainstream narrative seems to be "bonds are in a bubble that has burst or is about to burst...the bull market in rates is over".

So you're supposed to sell bonds and...what?  Buy stocks??  Feck off.


The bond bull market has been driven by massive increases in debt since mid-80s.   Debt pulls forward consumption from the future and leads to lower growth and lower inflation...and...lower bond yields.


The bond bull market will end when the Fed (and other CBs) monetize EVERYTHING which destroy the Treasury market and any fiat currency that doesn't have a commodity "tilt".  So maybe (MAYBE) AUD, NZD, and CAD will do better.



LawsofPhysics Sun, 02/25/2018 - 19:03 Permalink

Complete bullshit. The Fed and central bankers/financiers of the world are much too far down the rabbit hole Alice! There is no way that true price discovery will be allowed.  Get long black markets, sharecropping, and eventually guillotines.

The world has been here before, global Weimar is on bitchez!

ALL fiat currencies are dying, slowly...

In the meantime...

"Full Faith and Credit"

east of eden Sun, 02/25/2018 - 19:33 Permalink

Timeline 2022:

Ever since the US defaulted on their foreign treasury obligations (in 2019), trade with Canada, and other western countries has been dropping like a stone.

Formerly, Canada/US trade composed 62% of foreign trade receipts; it now accounts for less than 10%, while the Canadian dollar has qunitupled in value over the former 'King Dollar'.

The biggest problem on Canadian's radar screens these days is not selling INTO the US, but keeping refugees from the US, out of Canada.

Parliament sits next week and will debate the 'Canadian Border Security and anti-US immigration bill, tabled in the Commons, last week.

All opposition and government parties are agreed that pursuing further trade with the US is meaningless, as they no longer have the ability to pay in gold or other hard currencies.


mo mule Sun, 02/25/2018 - 19:44 Permalink

The Feds have been buying. The Fed's are giving money to the banks, thru the reverse repo market, to both large foreign and domestic banks, and they are the ones doing most of the buying of bonds.  It's just that they don't have enough monies to buy them all nor do they want to be the only buyer. There are other buyers, but rates would be much higher already if the Fed's where not doing funding thru the repo markets. This is like a snake eating it's own tail. Small bites for now, but in a big fall will they be able to or willing to buy enough, no  and  no ............ probably not.......lol

MrSteve Sun, 02/25/2018 - 19:58 Permalink

10 year T-notes yielding more than S&P500 is a problem for equity valuation, trade-wise. The falling dollar index is driving FX with furriners not able to buy Treasuries for a profit.


mo mule Sun, 02/25/2018 - 20:01 Permalink

I see higher interest rates b/c of monetary inflation and not from higher wages. 

Trump has double the national debt with this new tax plan that just past. 

You can't double the national debt and expect interest rate to remain the same.

This simply is a increase cost of doing business.  imho......lol

Higher funding cost for doing twice as much funding thru bond sales. 

The 10yr should be over 3% now say 3.5% at the next auction?

Forget the economy, or wages or imports, this is money expansion and increase cost of doing business, resulting in higher % rates...lol