Bill Cara: Sentiment shift for bond traders?, Wed., Mar. 22, 2006, 7:37 AM

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March 22, 2006

Sentiment shift for bond traders?, Wed., Mar. 22, 2006, 7:37 AM

Yesterday, the yields on U.S. Treasury paper popped across the board, probably caused by bond traders who are starting to sense reluctance by foreign investors to buy U.S. debts at current rates.

Higher yields/rates cause concern for quantitatively-oriented equity traders who are focused on Discounted Cash Flow models. Ergo, the equity market had quite a slide yesterday afternoon.

*** As "C.Note" informs us, "The yield on the 4-wk TB bought yesterday was 4.684%", which is considerably higher than shown here. The data in the table above is from Yahoo Finance, redistributed from ValuBond.com. I think there was quite a shift in the data when Yahoo switched recently from BankRate.com, as I recall. You will of course find different data from different vendors, e.g., Bloomberg. So what I recommend is that if you are using this data for trend & cycle research purposes only, as I do, you ought to stick with one reliable service. I happen to use the Yahoo Finance site because it is freely available to anybody, and is a popular site.***

Traders ought to watch the bond market closely here. A couple days ago, there were signs that bonds were strengthening. That sentiment seems to be shifting as oil prices started moving higher.

If commodity prices continue to rise at a fast clip, it could put inflationary pressures on the U.S. economy, further push down against the $USD, and push bond yields higher and PE multiples lower.

Another point: traders today cannot dismiss the importance of quantitative modeling and (linked) order management systems. By far the largest amount of order flow to NYSE/NASDAQ is computer program trading. I'd say that U.S. bond yields / interest rates have the greatest single impact on those computer-generated trading decisions, particularly in the short-term.

Posted by Posted by Bill Cara on March 22, 2006 07:37:15 AM | Category: Bonds

Discourse

The yield on the 4-wk TB bought yesterday was 4.684%

Posted by: C.Note at March 22, 2006 7:54 AM [link]

Sentiment for bonds began rolling over back in Feb (as previously noted), then began a real move to the negative the 1st of March. The counter trend move we saw in price was not matched with any change in trend to sentiment, as such it appears that the pendulum is swinging without interuption. The swing takes 2-3 months to play out and we are currently only about half way back to last November's pessimism level.

COT data (as has been pointed out here by another) is bullish for the long bond. I discount this due to the strong negative call on the equity side by COT data. Stocks are at an extreme in price RELATIVE to bonds- setting up a natural paired trade (for those so inclined) to short equities (overvalued) and go long the longest dated treasuries (undervalued RELATIVE) to hedge that aggressive short???

JMHO but any rally in stocks WITHOUT bond support is a selling 'gift' for equities. Things can change quickly but for now bonds are a key tell.

Posted by: stockman at March 22, 2006 8:47 AM [link]

Guys, I have to say that I REALLY APPRECIATE the fact that people like stockman, g034 and others (sorry if I missed a call out) post here and add to what Bill is conveying also. I always learn something.

Posted by: MarkM at March 22, 2006 9:15 AM [link]

g034's comment on seasonals reminds me...

seasonal negative for TYX through end of April, then declining yield trend historic through year end.

as I recall mid term election years are not generally good for the dollar, assume this would be a positive in the 4 year cycle for gold- anyone have data on this?

Posted by: stockman at March 22, 2006 9:26 AM [link]

I have to echo the words of MarkM who says he really appreciates the contributions of readers like g034, stockman, and others. Some of you are trading professionals of note, and I'd hope that increasingly we will have more of you adding to the commentary.

I often receive letters that thank me for having a website where anybody can learn a lot, to which I attribute much to the ongoing commentary. Thank you.

I happen to be like you all. I am a student of the market. I love to learn new stuff, especially when it can be put to use to make money, and increase my level of freedom. So, I am thankful when readers overlook my typos and endure my brain cramps, and challenge anything I have to contribute in the time I have available.

Sitting in an airport lounge a couple days ago, I checked my mail/comments, and one of them read: "Bill's blog lives on! (in my absence)" and that was really nice.

Thank you.

And despite my time off this month, and my diffused focus, you will be happy to see the web stats that I will post at the end of the month. In fact, as much as I appreciated the period April through July 2005, which was a difficult period for me with my parent's situation, this month alone will aggregate more readers than all those months combined.

Learning, and growing, and reaching out to more people is what drives me to blog.

Posted by: Bill Cara at March 22, 2006 9:57 AM [link]

If I was wanting to unload some inventory after that reversal yesterday... I would wish for an invisible hand to pop the bonds at the open... as a consequence... stocks follow and give me the opportunity to lighten up.

Who knows? But I'm watching to see if that bond pop fades as a clue.

Posted by: stockman at March 22, 2006 10:58 AM [link]

stockman-

It is now a mere chimera of its former self.

Posted by: MarkM at March 22, 2006 3:38 PM [link]

Bill/stockman/readers-

To back up your recent thesis, here is a quote from R. Russell talking about market internals:

"On February 1 with the Dow at 10953, Lowry's Buying Power Index (demand) stood at 446 and Lowry's Selling Pressure Index (supply) was at 485. Selling Pressure was dominating Buying Power and the spread between the two was 39 points in favor of Selling Pressure. Yesterday the Dow closed at 11235, which was 282 higher than its February 1 close. But yesterday Lowry's Buying Power was at 411, which was 35 points lower than it was on February 1, And yesterday Lowry's Selling Pressure was at 515, which was 30 points higher than it was on February 1. Yesterday the spread between the two had increased to 104 points in favor of Selling Pressure.

My conclusion is that investors have been selling into all the rallies, and that what we have seen during most of this year has been deterioration in the market's internals or the market's under-structure."

Time to be on the defensive.

Posted by: MarkM at March 23, 2006 6:46 AM [link]

That's what I was taught to do here, sell into strength (with my oil&gas etc). We here are generating this statistic. If oil/gas continues on the path indicated this morning, I'll do it some more. Power to the BLOG

Posted by: C.Note at March 23, 2006 9:56 AM [link]