U.S. Bond Market Poised to Rally

James Carville, advisor to then president Bill Clinton, famously said that he wanted to be reincarnated as the bond market so that he could intimidate everybody – and that’s because the bond market is usually right.

So what is happening with the bond market?

Large speculators are in a crowded short
The CFTC's Commitment of Traders report shows that large speculators (read: hedge funds) are either in crowded short or near crowded short positions in the 10-year and the long bond. The chart below shows the net position of large speculators in the long T-Bond futures contract. Readings were in a crowded short and there has been some minor short covering.

Coincidentally, long bond yields have fallen through a support line and bond prices have begun to rally.

In the 10-year, large speculators remain in a crowded short.
…and yields are sitting right at technical support.

These sentiment readings are evocative of a stretched rubber band ready to snap back. You don’t often see crowded long or crowded short positions in futures contracts. The dual crowded short readings in both the 10-year and long bond are even more rare and confirm my belief that the bond market is poised for a tactical rally.

Comments

[Macro_Man:]

I agree. A rally is near, question is timing of it. This morning, with the dollar still groping for the bottom, risk appetite seems high. Let's see if it lasts through the morning and takes stocks higher. Equities are at a very interesting stage at the moment and will soon show either that a top was set at 1039 or heading for a higher top before rolling over. Liquidity still seems ample and that makes it easy for the bulls to keep pushing things higher....against the inevitable reality of the bear market.

Anyhoo, I had bought some cheap TLT puts (95 strike, 93 and 92) over the past several days as TLT rallied..and am getting long TLT against the puts. Wouldn't want to be long TLT without put protection for now. After a few weeks, wont care about the puts. Volatility is going to be high given the 30yr auction and I feel better trading it with some protection on.

Sep 08 07:45 AM

[Michael Clark:]

How can bond prices go down? Little Ben has put a cushion under the market. He is buying every bond that isn't purchased by foreigners or hedge fund operators. Ben can't let interest rates drift up. That would ruin the recoveries in the stock markets and housing markets.

Little Ben is like the boy with his finger stuck in the dike. He doesn't know what else to do. If he takes his finger out of the bond market, the free market might take over -- and the price of his house might really collapse.

Sep 08 08:25 AM