David White

Positioning for a Bond Rally

The UUP also made a huge move up yesterday on mostly increased premium as the USD Index barely moved yesterday or today. Some of the premium disappeared today, but a lot is still there. UUP requested registration for 100M more shares.

The people buying the long bonds are probably not planning on holding the bonds too long. If we get a rise in the USD, which many are predicting short term (especially Prechter). It would push commodities and equities downward. People would want to get out of the USD carry trade on a USD rally. They would have to sell other assets in order to repay the USD's. This would push commodities and equities (many of which are commodity based) downward. When equities and commodities fall there is usually a flight to quality (bonds). This drives the price of the bonds upward. If the investor then sells those bonds at the near term bottom of the market, the investor earns extra money from the appreciation of the bonds. This is a plan that could work. Of course, the timing would have to be good. Plus you have to sell near the bottom. You also want to sell before the Fed starts pressuring the market with interest raises. Bonds would go down with a rate increase by the Fed (or perhaps even with the expectation of one in the near term).

The USD going up is not definitely necessary for this scenario. One could just figure the markets are tiring. Plus oil was at about $80. Both looked like they were poised to make a move downward. With the higher than expected unemployment it would seem likely that oil prices would move down on the expectation of a cooler economy. With higher unemployment people will spend less on gasoline, etc. Decreased demand should lead to a decrease in the price. Ditto for many other commodities. Equities would follow. Equities markets are already showing signs of being tired. They are ripe for a retracement.