Masters Series: Why Double-Digit Losses Are Possible in U.S. Treasury Bonds
Editor's note: The smart money is bearish on a certain "safe haven" asset... and is betting on a pullback.
As we explained yesterday, Steve Sjuggerud and his True Wealth Systems research team have discovered the power of "Magic Numbers."
In today's edition of our weekend Masters Series – adapted from a recent issue of True Wealth Systems Market Extremes – Steve uses that same data-driven approach to explain why U.S. Treasury bonds could fall 15% or more from here...
Why Double-Digit Losses Are Possible in U.S. Treasury Bonds
It's time to bet against one of the big winners of 2016...
Fear was the main emotion driving markets early this year. And that led to big gains in safe-haven assets like gold and U.S. Treasurys.
Today, the crowd is making an extreme bet on U.S. Treasury bonds. History says this could lead to a 15%-plus fall over the next 14 months.
Let me explain...
Today's extreme in U.S. Treasury bonds comes from one of our favorite sources, the Commitments of Traders ("COT") report. The COT report details the real-money bets of the futures market.
We love looking at the COT report because it doesn't just tell us how people feel... It tells us what they're actually doing with their money. The COT report is useful when it sits at an extreme – when futures traders all agree on a future outcome.
Today the COT report shows that hedgers (the "smart money") all expect U.S. Treasury bonds to fall.
The chart below shows the relationship between the COT report and Treasury bond yields. The top line (black) shows the iShares 20+ Year Treasury Bond Fund (TLT). The bottom line is the COT hedgers' contracts for U.S. Treasury bonds. You can easily see today's extreme...
The smart money hasn't bet against Treasury bonds this strongly since 2012, when U.S. interest rates hit all-time lows. That turned out to be a terrible time to buy U.S. Treasury bonds. And shares of TLT fell 17% over the next 14 months back then. (Remember, as Treasury bond prices – and TLT shares – rise, Treasury yields fall.)
That's a dramatic fall for a seemingly safe asset like Treasury bonds. But we could be in store for a similar decline today. In fact, it's already starting...
Like I said, Treasury bonds soared in early 2016. Shares of TLT soared 11% in the first six weeks of 2016. But they're down 4% in just the last three weeks.
This could be the start of a larger move, based on history. Remember, TLT fell a total of 17% during a similar setup in 2012.
We're not going to make a specific bet against Treasury bonds in True Wealth Systems. Our potential upside isn't large enough.
However, if 2016 scared you into safe-haven assets – specifically U.S. Treasury bonds – now is a good time to sell. History says lower prices are likely in the coming months.
Good investing,
Steve Sjuggerud
Editor's note: After six years and more than $1.5 million in research costs, Steve has figured out exactly how to find opportunities other investors can't see... and make outsized profits regardless of what's happening in the stock market. That's why he put together a brand-new presentation to share all of the details. Click here to watch it.