Far fewer traders/investors trade bonds than get involved in shares and their various indexes.  But I have been banging the drum for bonds for some time as I believe we are about to see some huge and very profitable moves.

Of course, it is rare for the fixed interest universe to grab headlines as opposed to stocks.  Bonds are definitely un-sexy compared with the likes of Tesla and Beyond Meat – and trading is dominated by the professionals, and that means the signals derived from them are often genuine.

My trading is focused on the 30-yr US Treasury as it has consistently provided me with excellent Elliott waves – and also very large profitable swings.  As a trader, that is all I need.

The Alice in Wonderland fixed interest world we now live in that I have highlighted here many times is summarised by this extract from a recent Bloomberg article

  • Year-to-date EGBs returns led by Greece (23%), Spain (10%), Portugal (9.8%) and Belgium (8.8%)
  • Around 25% of global debt now has a negative yield, amounting to a record high of $13.4 trillion
  • The entire core and semi-core European government bond spectrum out to 10-year is trading in negative yielding territory
  • Around 85% of the German government curve trades below 0%
  • Around 55% of Spanish government debt has a negative yield (with selective carry the place to be this year, see more here and here)
  • Italian front-end goes negative as BTPs turbo-charged sending 10Y lower by ~50bps in the five days through Wednesday, the largest such move since June 2018
  • Around 75% of Japanese government debt trades below 0%, highlighting the importance of yield-thirsty flow from Japan into the global bond markets (see examples of analysis here and here on this theme)
  • Around 80% of the active covered bonds of Germany and France, 83% of Spain and 57% of Denmark have negative yields
  • EUR 5y5y inflation swap has given back nearly all of the post-Sintra spike; the ECB needs to restore some inflation credibility, which should be the trigger for 10Y Bund yield to move back toward 0%, helped by positioning being built at yield lows.

Investors have been desperate for yield – as they have for some time. And junk debt – the very riskiest – as one of the few remaining areas to offer a positive yield, the bond mania is well and truly on.

And the bond pundits have been out on force confidently predicting yields will go even lower down the rabbit hole. With the ‘dovish’ Christine Lagarde expected to take over from Super Mario as head of the ECB, most pundits expect much more ‘accommodation’ from that source to push yields even lower.

Here is one quote: “The markets are really saying we expect more from the ECB,” Marilyn Watson, head of global fundamental fixed-income strategy at BlackRock told Bloomberg TV. “We expect yields to go lower still.

But will they?  Already DSI bulls of US T-Bonds are at an extreme reading of around 90% – and I imagine if a similar sentiment reading could be taken of EZ government bonds, it would likely be similar.

And there has been record inflows into bond funds recently – surely a sign of buyer exhaustion.

So, everybody expects yields to decline further into even more negative territory.  And that scenario is ideal for a textbook surprise for the majority in true contrarian fashion!

But what could upset the apple cart and send yields surging?  Certainly one factor could be a much improved global economy over that which is currently envisioned.  Estimates of global growth have been consistently lowered at least since the start of the year.  Any ‘surprise’ uplift would send the bond bulls running for cover.

If that does happen, then assets of all stripes will be in big trouble – including many interest rate-sensitive shares.  And the massive stock buy-backs will be in peril.  These have been responsible for much of the recent rallies.   Hmm.

US jobs are still being created

And right on cue, yesterday’s US non-farm jobs data came in much higher than expected and in accordance with my musings earlier this week.

I am quite sure Mr Trump will crow about that one this weekend!  

And to rub it all in, bond prices tumbled yesterday following the report.  And VIP Traders Club members positioned short yesterday morning on my advice right at the top

I had noted the lovely wedge forming and forecast a thrust up out of it – and then a huge reversal down.  And that is precisely what we got – a collapse from very overbought levels.

The good news on jobs = bad news for bonds.

My bad call on the dollar

Just to show I do not get every call correct, I had been bearish on the dollar as it broke below a major trendline a few days ago.  But leading up to yesterday’s jobs report, it was edging up back to that line.  In yesterday’s Trade Alert to the VIP TRADERS CLUB members, I pointed out that we were at the last chance saloon for a renewed move lower.

But it was not to be and the dollar rallied sharply on the jobs report

but right to the pink trendline and an important Fibonacci retrace, making this the moment of truth. If the rally can be sustained, I expect the market to go on to new highs and test the upper blue trendline.

But of course, it was not all bad for me – the stronger dollar accompanied the move lower in T-Bonds where we are short.  It’s an ill wind…

Naturally, we had close stops on our short dollar positions – a policy I religiously adhere to.  Now we can let the T-Bonds rip!

 

Are we there yet?

I am seeing signs of complacency in the MSM cropping up again just as the Dow/S&P/Nasdaq are making ATHs.  Today in the Telegraph (a most useful sentiment indicator), an article pointing out we are in the longest economic expansion in history – and he gives four reasons why, all of which seem very plausible.

This is all part of the ‘this time is different’ theme that always appears at major tops. So are we there yet?  Here is the S&P

We could be!  The rally off the June low is wave ‘d’ and sports a classic three up with both the ‘a’ and ‘c’ waves in fives as is required.  I have noted the position of the equinox and we are still in its influence, so if the turn occurs soon, we can say that the sun has done it!

 

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