Trader Scott
Just like clockwork, Wall Street stepped right in and turned bullish right at the highs in the bond market. In this video from 4/18, I discussed why almost everyone was now turning bullish on bonds – because the prices had rallied. I’ll keep repeating this forever, but the rising prices always breeds confidence (time to buy), and the falling prices does the opposite (time to sell). I make plenty of mistakes in markets, but not that one (anymore). And with bigger picture positions, I’ll use the hysterical sentiment on the “crashing” prices as a “buy signal”, and the complacent, confidence on the rallies as a “sell signal”. Two reasons why I did that video from one week ago, was because it was quite shocking how bullish people had become. The other reason was to tell whoever was watching that it is a horrible time to buy – bonds are in a massive bear market, and this is only a rally. Don’t sit around after a big rally in a market and try to come up with reasons/excuses to buy. If you’re short and you have to cover, fine, it happens to me also. But to actually voluntarily enter a new long position (and not as a daytrade) after a huge rally – why?
And look at these comments, after the huge bond rally right into the highs: “Guggenheim’s CIO Scott Minerd said Monday the drop in yields and rising demand for bonds result from “[Washington] D.C.’s struggle to pass pro-growth policies and rising geopolitical/military risks.”
According to Minerd, we could see 10-year Treasury yields drop to 1.5 percent “or lower” by this summer if this trend stays in place. That would amount to a 32 percent decline in rates from current levels, and the lowest yields we’ve seen since last summer.”
And this: “Here’s why: That euphoria over the prospects for regulatory reform and U.S. growth is now being discounted by the market. Confidence in the government’s ability to actually implement reform and effect change is fading ever since the administration failed to revamp health-care regulation. That has contributed to a weakened dollar.
Mounting geopolitical risks is another key driver of demand for long-dated Treasuries. President Trump’s growing focus on foreign policy, and his recent actions with regard to Syria and North Korea, have investors increasingly on edge.”
The articles are below:
From Bloomberg:
With days to spare before Congress has to reach a deal to keep the U.S. government running, bond traders see a potential showdown breathing new life into the Treasury market’s rally.
Assuming France’s presidential election doesn’t roil markets, the April 28 deadline for Congress to at least pass a stopgap spending measure and avert a government shutdown looks set to take center stage this week, with the calendar mostly devoid of major economic data or Federal Reserve speakers.
The negotiations in Washington will kick in as investors have lost confidence in the prospect of the administration and lawmakers hammering out fiscal stimulus any time soon, although President Donald Trump intends to release a tax plan this week. Republicans’ failed attempt to overhaul health care and the infighting it revealed have damped expectations for Trump to achieve his policy goals and led 10-year yields to retrace half of their post-election surge.
“The Trump reflation trade has disintegrated as the failure of the AHCA tells you all you need to know about the prospects of Trump’s agenda,” said Tom Simons, an economist at Jefferies LLC, referring to the Republican health-care bill. “A government shutdown would be another nail in the coffin for that idea.”
On the equities side, bank stocks may be vulnerable if a budget deal can’t be reached. The KBW Bank Index has tumbled about 10 percent since this year’s peak on March 1 amid fading expectations for tax cuts and deregulation.
Speaker Paul Ryan told House Republican colleagues Saturdaythat a spending bill will be ready in time to avert a potential shutdown. And there’s always the possibility that lawmakers can pass a stopgap spending measure to keep the government running while negotiations continue. But if a deal can’t be reached and funding expires, the government will partially shut down, similar to what happened in 2013.
Federal workers are furloughed if their agency is part of the annual appropriations process, according to the U.S. Office of Personnel Management. During the 2013 shutdown, some government economic data releases were postponed and rescheduled. The October jobs report, originally slated for Nov. 1, was delayed until Nov. 8 because of the 16-day impasse.
The Fed, which isn’t funded via congressional appropriations, released meeting minutes as scheduled during the 2013 shutdown. This year, the central bank is scheduled to make its next policy announcement May 3. The government’s April jobs report is slated for release May 5.
Goldman Sachs Group Inc. strategists said in an April 19 note that they see only a one-in-four chance of a shutdown by the deadline, as it appears Congress will pass a “‘clean’ short-term extension that avoids controversial issues.”
The risk rises to “around one-in-three” if the budget debate extends into May, since lawmakers may eventually demand a longer extension through fiscal year-end on Sept. 30, “which would require resolution of any controversial items.”
2013 Contrast
One difference between now and 2013 is that the debt ceiling is a non-issue. Since the Treasury reinstated the limit in March, it has employed extraordinary measures to extend its borrowing authority. In 2013, the shutdown coincided with a deadline on the debt ceiling, heightening investors’ uncertainty.
That leaves the focus this time around on the risk of a shutdown and the damage it would do to market sentiment.
“A government shutdown is not going to be reflective of a smooth-functioning Congress in the market’s mind,” said Lyngen, head of U.S. rates strategy at BMO. “And the longer it goes on, the further out people would push their expectations for anything in terms of deregulation or tax reform.”
From CNBC:
Buying long-dated U.S. Treasury ETFs was a pretty unpopular idea late last year. That tide now seems to be turning.
You could say a lot has changed in a few short months. Last fall, investors were faced with the end of the 30-year bond rally, and interest rates were expected to rise again, putting pressure on the value of bonds. More importantly, a new U.S. administration was coming in, with the promise of pursuing domestic growth policies that would fuel a stock market rally. It was all about risk-on.
A fund like the iShares 20+ Year Treasury Bond ETF (TLT) bled more than $850 million to net redemptions in less than two months following November’s presidential election. As money was coming out of the fund, TLT was dropping — to the tune of some 8.3 percent in losses in that same period.
And now, a month later, yields on 10-year Treasuries are testing the 2.2 percent level, down more than 40 basis points from their March high (bond yields fall when prices rise). TLT has seen net creations of more than $700 million year-to-date, half of which has come in the last month alone as the fund rallied some 5.5 percent. Year-to-date, TLT now has gains of about 4.1 percent.
What’s happening
The risk-off trade is popular again.
Here’s why: That euphoria over the prospects for regulatory reform and U.S. growth is now being discounted by the market. Confidence in the government’s ability to actually implement reform and effect change is fading ever since the administration failed to revamp health-care regulation. That has contributed to a weakened dollar.
Mounting geopolitical risks is another key driver of demand for long-dated Treasuries. President Trump’s growing focus on foreign policy, and his recent actions with regard to Syria and North Korea, have investors increasingly on edge.
Guggenheim’s CIO Scott Minerd said Monday the drop in yields and rising demand for bonds result from “[Washington] D.C.’s struggle to pass pro-growth policies and rising geopolitical/military risks.”
Massive short-bet unwinding
According to Minerd, we could see 10-year Treasury yields drop to 1.5 percent “or lower” by this summer if this trend stays in place. That would amount to a 32 percent decline in rates from current levels, and the lowest yields we’ve seen since last summer.
Minerd isn’t alone. DoubleLine’s Jeffrey Gundlach had been calling for a drop in yields and a test of the 2.2 percent level since earlier this year. The unwinding of that massive short position has something to do with it.
“With investors piling on to a one-sided trade, an unwinding of these positions could only add to demand,” reads DoubleLine’s most recent report. “As investors began to take down short positions through March, we have also kept an eye on inflation as it appears to be peaking out over the month of April, especially as the base effects from energy begin to roll off.”
Inflation peaking
The firm’s prediction includes inflation, as measured by the Consumer Price Index, peaking around 2.9 percent before turning lower into the summer months, “a move that could also be supportive of lower rates over the near term.”
What could push yields higher instead? A rate hike in June, if it’s accompanied by strong GDP data, DoubleLine said. The Federal Reserve raised rates again in March, and the market expects at least two more rate hikes this year. It remains to be seen whether June will bring one of them — the market is currently pricing a 50 percent chance.
TLT tracks a market-weighted index of U.S. Treasury bonds with remaining maturities of 20 years or more. The longer-dated the bond is, the more sensitive it is to interest-rate hikes. TLT has effective duration of about 17.5 years.
The ETF has $6.1 billion in assets and is the biggest and most liquid long-term U.S. Treasury fund on the market.
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