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Where Do Bonds Go from Here?

|Includes: SPDR S&P 500 Trust ETF (SPY)
Bernanke disappointed the market by not firing up the printing machines on Tuesday. It even has a name: QE2, for quantitative easing round 2. This disappointment generated a solid market thud on Wednesday as the "buy the rumor, sell the news" traders suddenly had no news to sell. Ouch. Wednesday's market behavior was also notable as stocks reversed their two month habit of rallying on bad economic news.

The bond market, on the other hand, has continued charging ahead stronger than ever. No doubt those who believe Treasuries are in a bubble are confused. My expectation is that this market behavior will continue. With the spector of Bernanke buying more bonds, look for the 30-yr. Treasury to gain on any news of economic weakness. This trade should hold up until either economic fundamentals improve (unlikely before next year) or Treasuries start reacting to news differently. This would entail Treasury yields rising (prices falling) on economic weakness or yields falling on better than expected economic news.

Disclosure: long 30-yr Treasuries, short SPY, long SPY puts