The big move in bonds may be over


There are four key points writes ukarlewitz in The Fat Pitch:

Retail and professionals have already made a big move out of fixed income. Trim Tabs estimates bond fund and ETF outflows in August will be the 4th largest ever - nearly 3% of assets have left in 3 months. Individual investors' holdings of bonds fell in July to a 4-year low and are likely lower now. For professionals, a BAML survey has 97% believing yields will be higher a year from now.

Fund manager weightings are at the bottom of a long-term range. A further big move down would be unprecedented. 57% are underweight bonds, the highest since the 2011 bottom in bond prices.

The recent change in yields looks to be out of proportion to actual economic data. The market is behaving as if the economy is at a 1987, 1995, or 2004 inflection point where unemployment falls low enough to send rates shooting higher. It just isn't so yet.

Bond yields are close to stabilizing or maybe turning lower - positive not just for TLT, but for other yield assets like dividend stocks (DVY), and mortgage REITs (REM).

Long-duration Treasury ETFs: TLH, TLT, IEF, DTYL, DLBL, ILTB, TENZ, ITE, TLO, EDV, VGIT, VGLT, TMF, TYD, LBND, UBT, UST, TMV, TYO, DSTJ, DSXJ, SBND, PST, TBT, DTYS, DLBS, TBF, TTT, TYNS, TYBS, TBX.

Dividend ETFs: FDL, FVD, MDIV, QDF, QDYN, QDEF, DIV, CVY, DVY, HDV, IYLD, PEY, PFM, SCHD, SDY, SDYL, DVYL, VYM, DHS, DTD, SYLD, KBWD, SPHD, DLN, DON, HILO.

Mortgage REIT ETFs: MORT, MORL.

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Comments (17)
  • Moon Kil Woong
    , contributor
    Comments (13546) | Send Message
     
    Short term bond yields may pause, but i think the intermediate and long term direction is higher until either the unwind happens, the economy slips into recession, and/or more QE is announced.
    20 Aug 2013, 04:24 PM Reply Like
  • American in Paris
    , contributor
    Comments (5495) | Send Message
     
    It is wishful thinking. Yields are still incredibly low levels. The real returns are negative!
    20 Aug 2013, 04:33 PM Reply Like
  • Marco Mazzocco, CFA
    , contributor
    Comments (193) | Send Message
     
    Unless domestic data turns negative or Westen Europe slides back into recession, I'll be staying bearish on rates till we reach a 6% 30yr. I'm sure it could take a couple years, but there will be ample oppotunities to manage a core short position the whole way up. I do worry about the EM situation, but I think any real turmoil there will be a short lived Treasury rally. I iknow people can make arguements that the macro picture is much worse than I think it is, but thats what makes some people optimists and others pessimists.
    20 Aug 2013, 04:49 PM Reply Like
  • Ian Farbrother
    , contributor
    Comments (288) | Send Message
     
    Great article. Nice to see actual data about positions. Added The Fat Pitch to my regular reading list!
    20 Aug 2013, 05:40 PM Reply Like
  • Flod
    , contributor
    Comments (190) | Send Message
     
    If the basic economic signals are in a favourable direction(unemployement lower, consumerconfidence higher) tapering of QE is an option. However, this should be performed while keeping low interest rate. There should be looked for a kind of a balance between said economic signals and tapering of QE.
    20 Aug 2013, 06:07 PM Reply Like
  • redarrow5150
    , contributor
    Comments (1375) | Send Message
     
    There's an unusual disconnect with what's happening in the bond market. I've said it before the bond rate going into the FED meeting should be around 2% based upon economic growth. I think what is getting lost in the tapering talk is even if the FED does slow it down they will do it slowly. Also even if the FED does start tapering, there's a good chance that ECB or even Japan will increase there own. For as many people bemoaning economic growth how bond rates have been quickly rising flies in the face of what they themselves say.
    20 Aug 2013, 06:27 PM Reply Like
  • Hendershott
    , contributor
    Comments (1831) | Send Message
     
    Inshallah
    20 Aug 2013, 06:41 PM Reply Like
  • RS055
    , contributor
    Comments (5671) | Send Message
     
    Consensus: Sept taper $85 bn >> $70 Bn, End of QE 6/2014

     

    Likely outcome: Sept taper to $70bn, no indications of end of QE >>>> Very bullish!!
    20 Aug 2013, 06:50 PM Reply Like
  • RS055
    , contributor
    Comments (5671) | Send Message
     
    Why?
    Fed calclulates that Budget Deficit is projected to fall to about $70bn/mo starting FY2014 ( Sept 30, 2013).
    If they monetize all of it , bond yields may stay where they are. If they dont monetize all of it , bond yields will rise.
    Do they really want to let bond yields rise further with all of the feedback loops via derivatives, mortgages etc? Do ya feel lucky punk?
    20 Aug 2013, 06:53 PM Reply Like
  • RS055
    , contributor
    Comments (5671) | Send Message
     
    Additionally - it depends on whether our foreign benefactors - China etc continue to hold steady on their Treasury holdings. The last TIC report showed a rush to the exits.
    Therefore - the Fed may need to monetize more than the Fereral Budget Deficit ( to the extent furriners sell theirs).
    Its all quite simple - once you turn off the TV and the endless blather about employment reports and such.
    20 Aug 2013, 07:02 PM Reply Like
  • RS055
    , contributor
    Comments (5671) | Send Message
     
    Of course the Fed will Never Ever admit to monetizing the Deficit. Why?
    Because the central Banker of the world all went to good schools and leart that doing so was the downfall of many previous "civilizations". Long history of Europeans who resorted to monetizing - and saw their currencies go to Zero. ( esp. france).
    But - our Fed believes that thier MIT education makes them smarter than their ancestors. These kinds of things wont happen to them - because they have complex models ( using 18th century higher math) and such - plus .... well.... they are just so much smarter.
    20 Aug 2013, 07:08 PM Reply Like
  • Lares Capital
    , contributor
    Comments (438) | Send Message
     
    "BAML survey has 97% believing yields will be higher a year from now."

     

    The most important investing rule: When all the experts and forecasts agree – something else is going to happen.
    20 Aug 2013, 07:49 PM Reply Like
  • Davephd
    , contributor
    Comments (1180) | Send Message
     
    Yes, and the something else could be total financial collapse.
    20 Aug 2013, 08:13 PM Reply Like
  • redarrow5150
    , contributor
    Comments (1375) | Send Message
     
    Chicken Little.
    20 Aug 2013, 08:15 PM Reply Like
  • American in Paris
    , contributor
    Comments (5495) | Send Message
     
    Not necessarily, Igor.
    21 Aug 2013, 05:47 PM Reply Like
  • minecanary
    , contributor
    Comments (1353) | Send Message
     
    Ben?...Ben?....Is that you? . Long live your legacy, buddy.
    20 Aug 2013, 10:28 PM Reply Like
  • sethmcs
    , contributor
    Comments (3573) | Send Message
     
    Although a tricky situation the goal of the fed is to normalize interest rates without causing a panic. Talking them up and down is the only tool they have left. Next part is to get the ten year over 3% without a market swoon. So far so good.
    21 Aug 2013, 12:08 AM Reply Like
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