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November 10, 2005
Strong move in bonds, Thurs., Nov. 10, 2005, 3:00 PM
The 10-year U.S. Treasury auction went much better than anticipated today. Combine that with an effort by Congress to cut the budget deficit, and fixed income investors have become happier campers. At least there has been quite a rally in these instruments, and that has pushed the equity market higher.
Last Saturday in my Week in Review, I made the following comment:
"Nothing drops too far, too fast, without a correction of sorts. It could happen in the bonds soon, or maybe not. I'm not a bond trader, so I don't have a sense of those things. But I do think the fundamentals still look weak (rising rates, inflation issues, and government spenders who ignore Mr. Greenspan, and a Fed Head successor with a rep for reflating out of any problem). Also there is the problem with the Chinese Renminbi, that once it is revalued higher, takes the USD lower, and inflation higher, and interest rates higher, and on and on."
A few of you were expecting the bond rally, purely on a technical basis. Here you can see how oversold the bonds had been, how (using the Hourly data charts) they have bounced as yields dropped. In fact with the interactive chart, you can go in and check the 5-minute data even, for a closer look. Look to see how the RSI topped the 70 level (on the yields) and dropped below the 30 level (on the instruments) before turning.
You can also see (from other charts below) how the most interest-sensitive equities have responded.
Interest rates and bond yields.
US Bond Funds -- Monthly Data Charts
US Bond Funds -- Weekly Data Charts
US Bond Funds -- Daily Data Charts
US Bond Funds -- Hourly Data Charts
Consumer Finance -USA -- Weekly Data Charts
Consumer Finance -USA -- Daily Data Charts
Consumer Finance -USA -- Hourly Data Charts
Haver Analytics (delivered to me by Econoday) has described the situation as follows. I am no bond expert, but the rapidly narrowing gap between the 10-year T-Note and the Fed Funds Target indicates a serious problem ahead unless the 10-year Note yields rally quite a bit. I have based my investment outlook and strategies on the view that long bonds would weaken further and that any rally like this one will be relatively short-lived.
Posted by Posted by Bill Cara on November 10, 2005 03:01:08 PM | Category: Bonds
Bill,
This is what we've been talking about. Oversold bonds get a bid and rally enough for the bonus seeking managers to bid up stocks through the end of the year. It may happen, but when everyone thinks it will happen, well, you know...
But if the S&P can clear the 1245 level (new highs), we could see the last, tiny bit of cash available in fund accounts go into the market followed by the grand poobahs of CNBC declaring that the "Bull is here, you should have stayed in, don't miss out, or; in the last 20 years, if you missed x amount of up days your returns would have been....so stay invested...blah, blah, blah". And, if these new highs happens quickly enough, the "smart money" will have enough time to distribute stocks to Joe Sixpack (Don't take offense, I like beer too!) before year end, because January may not be gentle to liquidators. This will propel the market like it was shot from a circus cannon, only you may not have the net below you. Speaking of circus clowns, I used to trade ZZZ but it put me to sleep;)
How many people are going to buy at overbought levels because they don't want to miss out? Maybe it will work out for them, but it usually doesn't (especially if it is me doing the buying!).
BTW, as you see, the curve is flattening.
Maybe the trade of 2006 will be shorting the S&P on the first trading day of the year.... But then I'd be taking money from Joe Sixpack too and where is the social equity in that?
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November 10, 2005 4:00 PM [link]