Bonds – the Approaching Bear Market
As per usual, virtually everyone was bullish on US Treasuries into the July 6th low yield on the 10 year Treasury of 1.35%. Almost two weeks ago, my belief was the 10 year will see ending action above 2.4% and an entry point to go the other way for a trade. The yield reached 2.42% and we have seen ending action, along with hysterical talk of a bond market crash. On the annotated 10 year yield chart, we can see the recent low yield in July was actually a re-test of the 7/26/2012 selling climax (inverted to the price, since this is a yield chart), when the low yield was 1.39%. As I’ve written about repeatedly, like here, we are witnessing the end of the massive 35 year bond bull market which started on 10/26/1981, when yields topped at 15.21%. And this is happening right before our eyes – truly historic – so we should pay a lot of attention to this. It will be a tremendous learning experience for all of us and it will be written about in the history books (although probably incompetently and with bias). And it is still my belief this long term chart of US Treasuries is the most important chart in the world.
So where do we stand now with bonds. For perspective back in June before the push to new record lows on July 6th, my belief is we’d still likely get one more push down to new record lows. That is very unlikely going forward, as 2017 has been the likeliest time for the longer term yields to finally join the barely noticed major bear market in shorter term US Treasuries. Shorter term Treasuries are at 8 year highs (prices at 8 year lows). For years we’ve heard people tell us the Fed would bring negative rates to the US, oblivious to the fact that the market was already telling us short term rates we’re headed higher. And since the Fed followsthe market, they do not lead, the market was already “telling” us what the Fed would be doing. Short term interest rates bottomed in 2011. It’s very likely in a few years, people will be talking about 2016 as the bottom in long term rates. So currently, bonds (prices) got very oversold, the sentiment was hysterically bearish, and we reached important support levels (2.40%+ on the 10 year yields – inverse) – nearing a set up for a shorter term trade. We should see the next excellent short selling opportunity beginning of next year. And my strategy going forward for bond instruments is geared towards inflation adjustable products.
Everything I see from the President-elect is just a continuation of the policies of the last several decades. I’m baffled how any “free market” proponents could be excited about what Mr. Trump is proposing. Absolutely nothing about truly cutting government spending is going to be done. Which means (maybe we’ll see) tax cuts, which are supposedly going to “pay for themselves”, which as far as I know, has never actually happened. I’m all for cutting taxes, but if whole Departments are not chopped off, it means more borrowing and “printing”. It’s just a beautiful set up, economically, for 2017 to really get the bear market in bonds to kick it up a bit. And it is not an “improving Trump economy” which has me worried about the push higher in yields. For years it’s been the exact opposite – meaning we’re heading into a period when the horrible economy and credit quality issues, which will be the huge problem for all types of bonds.
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.