The Great Rotation

Surprise, surprise – we are seeing Treasury yields actually fall in recent days.  That wasn’t supposed to happen, was it?  Pundits were all over themselves projecting spiking yields as they suddenly noticed the T-Bond yields had risen from 2.44% low in August 2012 to the recent 4% – a gain of 64%.

Not only that, but short interest in T-Bond futures has reached a five-year high on the back of extreme bearish sentiment.  I have seen so many articles forecasting much higher yields as the Fed, the biggest Treasury buyer, will be scaling back purchases.  Less demand = higher yields, right?

Not so fast.  What if the US data starts getting weaker?  After all, the last jobs report was no champagne event.  This may well herald a slowdown in the US economy.  God knows there are plenty of signs this is actually happening. Corporate earnings guidance is already showing weakness. Will the Fed then decide to put a halt to its tapering under the new chairperson?

Also, Yellen needs to put her stamp on her new role and this would accomplish  that quite nicely.  If the market got a whiff of this, stocks would crash and T-Bonds would soar in a massive short squeeze.

And contrary to expectations, the Chinese (the biggest holders of US debt) have not been dumping bonds.  In fact, recent data shows they have been big buyers in the last few months

The Great Rotation has started, but the other way

Last year, we heard a lot about the Great Rotation of funds out of bond funds and into equities.  We are now seeing the opposite flow out of equities and into bonds.  Here is the T-Bond chart:

I foresee  a huge short squeeze in the T-Bonds and remain long, looking for a run to my 3.60 yield target.

And if we are at or near the top in stocks here, the deluge will intensify in a flight to safety.  Because bullish complacency on the stock market is at a record (you only have to glance at the media to see that there are zero bearish opinions out there), this flight to safety I foresee will me historic.