Don’t you love it how, now – after the biggest sell-off in fixed income in decades – suddenly everyone is bearish?
Long-time readers will know how I am a Kodiak Brown when it comes to fixed-income, but even I can’t bring myself to sell into this hole. I mean, c’mon – do you really think that waiting for your guru to announce on CNBC that two closes above 3.25% for the 30-year bond constitutes a trading strategy?
The always insightful Trevor Noren from 13D Global Research recently tweeted a chart from the WSJ’s Daily Shot that demonstrated the true extent of the bond market’s oversold nature:
Whereas a quarter or two ago all the deflationistas were busy predicting the end of the world for risk assets, today they have switched to equally dire predictions regarding the bond market. Now instead of the warnings about the economy rolling over, they are banging the drum that the United States government will be unable to fund itself, thus suggesting bonds are a screaming sell.
Well let me you in on a little secret. The US will has no trouble funding itself. That’s not what’s going on.
If the bond market was truly worried about US government’s deficits, they would be monkey-hammering the long-end of the bond market. Yet the US 2-year note yields 2.88% while the 30-year bond is only 55 basis points higher at 3.43%. That’s not a yield curve worried about US fiscal situation.
And let’s face it, if Japan can maintain control of their bond market with their bat-shit-crazy debt-to-GDP level of 236%, the US will be just fine for quite some time.
Remember the narrative spun last month by the bond bulls about how the “largest bond short speculative position in history” would meet its fiery end when the US economy rolled over? I pushed back hard on this thesis. To me it felt like the theory was badly flawed and, if anything, the specs were leaning long (The “Big Bond Short” Illusion).
