If there was one thing that I was reasonably sure about some 10 months ago it was that US Treasury markets (TLT) would have been materially lower by now and that commodity markets would have been materially higher. Well, our long commodities (DBC) and short US Treasuries (long TBT) "call" is certainly not wrong but we have absolutely nothing to show for our patience and diligence!
A few weekends ago I had the pleasure of reading The Big Short. Perhaps now we understand what Michael Burry went through waiting for some two years for his "short sub prime" trade to pay off. Making money on the sub-prime collapse was one thing, holding on to a losing trade and paying away premiums each month for some 24 months is something very different! We admire someone who believed in his convictions and held on even when it almost cost him his fund!
How long will we have to wait? Are we right in our assessment to be short Treasuries? Only time will tell. If we are wrong, (ie.12 months from now yields on the US 30 yr are materially lower), what confirming evidence would we likely see now? Let's have a look.
We should see weakness in precious metals or at least relative weakness in gold as compared to the US 10yr. That certainly does not appear to be the case. Gold is within a whisker of breaking to a multi-week high against the US 10yr (using IEF as a proxy):
Gold relative to US 10yr (IEF)
We would also expect to see gold turning negative against a basket of paper currencies. Well against the CAD (one of the strongest paper currencies) gold looks more bullish than bearish:
Gold in CADs
We would also expect to see a reduction in the "inflation premium". Looking at the US 5 year forward and the US 10yr Breakeven it does not appear as if inflation premiums are losing momentum, rather quite the opposite:
5yr 5yr Forward Breakeven
US 10yr Breakeven
Granted the inflation premiums are not high at this stage but it is not so much the absolute level that is important rather it is the direction.
So there can only be two conclusions:
- We are blinded or fooled by randomness in that there is no "pattern" in the four charts presented above and they are about to fall over and that the real deal lies with the bullish action in the US 30yr over the last few days,
- What we are seeing above is correct in that the action in the US 30 year is a bull trap; i.e. yields will move materially higher over the coming months.
Of course our money is on outcome 2. We don't have a problem waiting it out to ultimately be proven correct(we have waited longer before). One just hopes that we have not missed something and now find ourselves walking into a bear trap!
Please let us know if you have evidence to the contrary.
Disclosure: Long TBT, GLD