An Incredibly Bearish Sign for Bonds
Is Steve's latest prediction already coming true?... China spooks the market... An incredibly bearish sign for bonds... The world's two best-known bond investors agree with Steve...
Is Sjug's interest-rate prediction already playing out?
If the latest moves in the bond market are any indication, the answer is "yes."
Regular readers may recall we shared Steve Sjuggerud's view on rates last week. In short, he believes that this year could bring the first significant increase in long-term rates in years.
This was a bold call. If you're new to the markets, you may not realize that economists have been predicting higher long-term rates for years... even decades in some cases. And they've been dead wrong the whole time.
Steve believes 2018 is the year they'll finally be right.
But Steve's prediction had little to do with the economic factors most economists talk about...
Instead, it was largely about sentiment. Treasury bonds – and the yields they pay – are like any other asset. When the crowd is betting on them to move one direction, they tend to move the other way.
And lately, "the crowd" – in this case, speculative traders – has been betting big on higher bond prices. As we explained last week...
The Commitments of Traders ("COT") report is published weekly by the U.S. Commodity Futures Trading Commission. It shows the real-money bets of futures traders across dozens of asset markets. And right now, it shows speculative traders are more bullish on Treasury bonds than almost any other time in history...
Remember, bond prices and interest rates (or 'yields') trade inversely...
So these near-record bets on higher bond prices also represent near-record bets on lower long-term rates. And the last time traders were this bullish – in mid-2016 – it didn't work out so well for them.
The yield on 30-year Treasury bonds bottomed around 2% in July 2016... and quickly surged to more than 3.2% by the following March. The yield on benchmark 10-year Treasury notes made a similar move, from around 1.3% to more than 2.5% over that period.
These are considered big short-term moves in the relatively "boring" bond market.
As we noted last week, a repeat of these moves would be significant...
It would create the first uptrend – defined as a series of higher lows and higher highs – in interest rates in decades. And it would likely signal an official end to the 40-year bull market in bonds.
We aren't there yet... But we're already seeing signs that a new rally in rates could be underway.
Long-term bond prices have been quietly falling for weeks, and rates are now breaking out to multi-month highs. Most
Rates were up again today following an overnight warning from China...
The world's largest foreign holder of Treasurys said it was considering stepping back from the U.S. sovereign bond market. As Bloomberg reported this morning...
China added to bond investors' jitters on Wednesday as traders braced for what they feared could be the end of a three-decade bull market.
Senior government officials in Beijing reviewing the nation's foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasurys, according to people familiar with the matter.
The news comes as global debt markets were already selling off amid signs that central banks are starting to step back after years of bond-buying stimulus. Yields on 10-year Treasurys rose for a fifth day, touching the highest since March.
This is a legitimate concern...
After all, the Federal Reserve – which has been among the largest buyers of Treasury debt over the past 10 years – is already "tapering" its bond portfolio. If both the Fed and China stop buying U.S. government debt, it could put even more upward pressure on rates.
But the biggest reason to remain bearish on Treasury bonds today remains sentiment.
You see, despite the recent rise in rates, the latest COT data show speculators are still incredibly bullish. In fact, as this updated chart illustrates, they're now more bullish on bonds than ever before...
This is a big bearish sign for bonds. Don't be surprised if Steve is correct (again), and rates move much higher this year.
But Steve isn't alone...
The world's two best-known bond investors now agree.
Regular readers know Jeffrey Gundlach of DoubleLine Capital has been bearish on Treasurys for months. The so-called "Bond God" – who correctly called the bottom in interest rates in 2016 – expects the 10-year Treasury yield to rise to 3% this year, officially marking the start of a new bear market.
This week, Bill Gross – the "Bond King" who co-founded investment management firm PIMCO – went even further. As Gross' new firm noted on social media service Twitter yesterday...
If you still own any "return-free risk" in U.S. government bonds, this could be your last great chance to reconsider.
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In today's mailbag: Another reader shares his experience with TradeStops... and more on the "controversy" surrounding the Stansberry Terminal. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com.
"Porter, et. al, I too struggled with integrating TradeStops to my Stansberry recommendations. Here is what I have found that works for me.
"If I decide to buy a Stansberry recommendation, I disregard what TradeStops has to say. If/when the editor recommends to SELL a position, then I follow TradeStops. In other words, if TradeStops says 'RED,' then I sell. If it is anything other than 'RED,' I hold until such time as the [TradeStops indicator] goes 'RED' or I decide I have a better use for those funds. Not necessarily the 'approved solution,' but it works for me. P.S. This technique has allowed me to continue to enjoy the ride in STZ... upwards of 1,000% so far. Just sayin'..." – Paid-up Stansberry Alliance member Joe Matchette
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Justin Brill
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January 10, 2018