There's At Least 3.8 Trillion Reasons Why Gundlach Might Be Wrong About Bonds

In tonight's presentation, DoubleLine's Jeff Gundlach reiterated his warning to investors that 10Y yields "are likely to break out to the upside."

He certainly nailed it last time, when he pointed to his 'favorite' indicator (Copper/Gold) signaling that bond yields were due to go considerably higher...

But as is evident above, copper underperformance in recent weeks have not helped his case and now, 10Y Yields actually look 'high' relative to the inflationary aspects of commodities.

However, there is another reason for doubting the next move in bond yields is a breakout to the upside... actually there are a few trillion reasons...

In late February, Citi that the risk seemed to be that everyone was positioned short of fixed income just as the benchmark for duration (30y US Treasury yields) tested multi-year resistance amidst probably the most bond bearish outlook imaginable.

Consider for a moment what bond investors have seen in the last couple of months...

We have a weak dollar in an environment where the unemployment rate has been below NAIRU for years, inflation is accelerating, fiscal stimulus will boost GDP to nearly 2x trend...

And rates still can't break out!?

Citi sees something else ahead and disagrees with Gundlach:

We channeled Mo Udall when downplaying the impact of tariffs (steel and aluminum) that impact less than 1.0% of imports and a couple tenths of a percent of GDP.

He taught us that when everyone agrees something else is probably going to happen.

It is time to channel him again as 30y yields look poised to break 3.10% in benchmark yield terms for a test of support near 2.7%

Simply put, everyone and their pet squirrel is record short duration (aggregate Treasury futures complex net speculative positioning shown)...

And as the chart also shows, there is now almost $4 trillion debt on rate-hikes continuing ad nauseum.

So, will it be different this time? Will all these investors on the same side of the boat be right? 30Y Yields have fallen 10bps in two days and are testing the low end of the yield channel of the last month or so...

Will these record shorts start to unwind if we 'breakout' lower?



Not Too Important HRH of Aquitaine 2.0 Tue, 03/13/2018 - 20:37 Permalink

Velocity of Money. The economy survives by money moving through it. If the money stops moving, the economy stops moving.

The wealthy didn't spend what the Fed gave them, they're hoarding it for the next Depression. If the money was given to Main Street, it would have been spent - moving through the economy.

The entire world depends on the Velocity of Money. The chart would show the true state of the US economy, and spook the investors and algos. Maybe they do still publish the VOM chart, anyone know?

The Social Security Administration and CDC stopped putting out detailed Death Data seven months after Fukushima. Researchers were screaming. 'They' don't want to publish anything that might tell the mathematical truth.

In reply to by HRH of Aquitaine 2.0

gdpetti wisehiney Tue, 03/13/2018 - 19:57 Permalink

As James Bond realized: "never say never again"... as when the NWO really wants to 'pull the rug out', it's is extremely simple to do... and they will do it for maximum benefit to themselves... likely to wait until all that offshore corporate money is done buying back their own board's stock portfolios.... as for 'retail', who cares about them ever?

In reply to by wisehiney

khakuda Tue, 03/13/2018 - 19:54 Permalink

Sorry, even though CBs everywhere and the Chinese buy at any price, a 30 year yielding slightly over 3% makes little sense.  I buy that thing and take home 2% a year after taxes at best when inflation is likely to be well more than that over 30 years with everyone printing money to pay unsustainable debts.

The Fed should be not be talking and laying out their balance sheet reduction plan.  They should be selling down their balance sheet rapidly while the getting is good.

yz Tue, 03/13/2018 - 20:03 Permalink

3.8 trillion ED shorts are betting on the 30 yr. they're betting 3 month libor keeps rising.


apples, meet oranges


edit: are NOT

Jamesf1010 Tue, 03/13/2018 - 20:34 Permalink

I'm having my doubts about a bond market collapse myself because 1. The interest expense to the gov't may be too much for them to allow it and we're stuck with high inflation and/or 2. The economy isn't nearly as vibrant as they say it is. So if bonds yields do creep higher due to supply/demand issues it will be a slow, gradual crawl. Or maybe who knows what's going to happen. The new normal. Old rules definitely do not apply anymore. 

ThanksIwillHav… Tue, 03/13/2018 - 21:29 Permalink

In a panic "investors" bail from stocks to bonds.  Why?  Stocks are pieces of paper while bonds are a call on assets.   Once the rush to bonds starts then among bonds there will be a fight.  There is no way all bonds implode because of the asset call.   That said right now stay on the short end until rates are more stable.   In 2008-2009 stocks lost 50% while bonds lost 6%.    

MrSteve ThanksIwillHav… Tue, 03/13/2018 - 22:48 Permalink

GM bondholders took it in the neck but TLT, long Treasuries rose maybe 9% in 2008 and their price has up-trended ever since. The long term rates are set by the market and short term rates are set by the FED, more or less. I think of bonds as leverage on currency and so their rates signal what is happening in a currency. Right now, a dollar is worth about one pint of orange juice.

In reply to by ThanksIwillHav…

Harry Lightning Wed, 03/14/2018 - 00:20 Permalink

I would suggest that anyone who can get a Monthly Bar Chart of the 30 Year US Treasury Yield do so, and look at a downward sloping trend line that connects the high yield from August, 1990 with the high yield from February 2011. That trend line comes in at right around 3.25 for March and April of 2018. I am waiting for Bond yields to touch that downward sloping line, because if they hold from there, then I expect a significant rally in bond prices. The momentum indicators would turn positive for bond prices, and with a little help from a falling stock market, we could easily see bond yields make a lower low than in 2016. 

Federal Reserve tightening usually grabs hold of the economy after about 200 basis points and two years of duration. We're getting close to both now. On top of that, I find it hard to believe that the stock market would not experience a substantive pullback should bond yields break through that downward sloping long term trend line, which it and of itself should bring money into the bond market.

I am not at all convinced that the present state of economic activity is nothing more than a sugar high caused first by ten years of easy monetary policy, with the tax cut cherry on top giving the final turbo-charged boost. Imagine what would happen if the Fed got serious about slowing inflation down by moving 50 points at one shot, the shock would be so great to a whole generation of traders who've been spoon-fed these well-telegraphed 25 point baby-steps that no one would know what to do except close out of stock positions. 

So time will tell what happens,, and surely there are arguments for the bearish case in bonds. Just from an historical perspective, bind yields for the last 20 years have averaged something like 228 basis points over trailing 12 month Consumer Price Index inflation, meaning that by historical standards bond yields should be closer to 4.60% right now then 3.25%. And if that downward sloping trend line I discussed above is broken convincingly, I think that'as where bond yields will go, back to their historical norms. But for right now, I would be hard-pressed to believe that overly-extended stock market and thus the economy in general could withstand that kind of interest rate increase, and as such, the path of least resistance for bond yields remains down.

abgary1 Wed, 03/14/2018 - 16:17 Permalink

After 9 years of the central banks buying every sovereign bond on the planet and killing interest rates, there just may be some pent up demand from institutional investors that really don't want to be in the equity markets.