Wednesday, May 27, 2009

Bond Tsunami

Worms turn. They don't spin, but they do turn. Something seismic is happening in the bond market and while the world focuses on the equity rebound, bonds are collapsing. Having said that I have become very cautious short term on selling bonds in a hurry. But longer term, this goose is cooked.

The change in the 20+yr US Treasure ETF has had parabolic moves in the past nine months. With the time honored premise that trees don't grow to heaven have things gotten ahead of themselves? While I am a believer still that inflation is ahead of us in a few years the short bond trade is looking crowded.

When it hit the fan last November the Long Bond ETF (TLT) went from 93 to 123 in a month as the market went completely risk averse. Now, TLT is back to 93 as market participants have become less risk averse as well as concerned for the US debt policy.

The short Thirty Year ETF (TBT)is up over 5% in the past month and the Rydex inverse Long Government Bond Fund is up nearly 10%.

Whereas a month ago I was commenting on the Ten Year yield bumping up against 3.00% in my April 29th post, "Dog off the Leash" TNX broke through the yield is now decisively above 3.50%.

The spread between 2 year treasuries and 30 treasuries has never been greater. In normal times this would be a call to profit for the banks as they do what banks do, borrow short and lend long and make money on the difference. But this spread is telling us more.

The recent treasury auctions show foreign central banks buying the two year note, but as one goes further out there is very little interest. The world is giving a mighty thumbs down to the US long term fiscal and monetary policy.

Pay attention, its getting way too interesting.

Next posting - Treasury Inflation Protected Securities

John Barnyak