Bond Rally Looks Crowded and Tiring

Thursday, August 31, 2006 | 03:15 PM

The Bond rally is moving towards breathless coverage on CNBC. Mike Panzner informs us that 10 days ago, Bloomberg reported:

"Hedge-fund managers and other large speculators placed a record amount of bets the 10-year U.S. Treasury note will gain, according to weekly data from the U.S. Commodity Futures Trading Commission. Bets on a decline in two-year notes also rose to a record.

Speculative long positions, or bets prices will increase, outnumbered short positions in 10-year-note futures by 312,492 contracts on the Chicago Board of Trade in the week ended Aug. 15. Net-short positions in two-year-note futures rose to 92,942 contracts, the Washington-based commission said in its Commitments of Traders report."

Similarly, Mark Hulbert noted in a MarketWatch article that "the majority of bond market timing newsletters tracked by the the Hulbert Financial Digest think that" the treasury bond market will rally.

Meanwhile, the chart of the 10-year note yield reveals a market that is testing key near-term support and is near multi-year oversold extremes, suggesting that bond prices, which move in the opposite direction to yields, are  vulnerable to at least a near term correction.


10 year Yield, (Six Years) with 14 day RSI
RSI range 0-100, with 30 and 70 (red lines bottom) as overbought/oversold measures


Regardless of fundamental factors such as the recent Fed pause and signs that the economy may be slowing down, which are likely already somewhat factored into prices, the combination of exuberant optimism, excessive speculation, and a  negative technical picture usually means only one thing: prices are headed for a fall.

Panzner states: "Sounds like it's time to take some money off the table if you are long U.S. bonds."

A counter trend rally is not unthinkable here -- especially if NFP tomorrow is too strong or average hourly earnings is too hot -- either of which could take the Fed off "Pause."


UPDATE: August 31, 2006 6:05 pm

Richard Suttmeier  notes this his call for U.S. Treasury yields: the low yields for the remainder of the year will be set today or tomorrow. He writes at Real Money:

Momentum is excessively overbought for bonds, and the U.S. Treasury coupon curve straddles the 200-day simple moving averages at 4.777 on the two-year, 4.740 on the five-year, 4.796 on the 10-year and 4.891 on the 30-year. This lines up with weekly resistances at 4.796 on the two-year, 4.688 on the five-year, 4.750 on the 10-year and 4.898 on the 30-year. This morning's low yields have been 4.796, 4.703, 4.740 and 4.896, respectively.

A close this week cheaper than my quarterly pivot at 4.734 on the five-year indicates that my bearish call on bonds could be on the money.

Treasury yields have been declining since July 5 with the yield on the 30-year approached its 200-day simple moving average (SMA) at 4.89 this morning, down from 5.29 on July 5. This has made my measure of daily momentum even more overbought today then a year ago when the 30-year yield began to rise from 4.25 to above 5.25 into May 2006. I see this risk again, as the Federal Reserve may not be done raising rates, and even if they are, inflation remains an issue. If the economy goes into a soft landing, deficits should rise indicating increased Treasury supply. The 30-Year will begin quarterly issuance in February, and inflationary expectations are too high to justify sub-5% long-term yields.



Too many bond bulls
Commentary: Don't bet that 'this time is different' and rally will continue
Mark Hulbert
MarketWatch, 12:01 AM ET Aug 29, 2006

Futures Traders Put Record Bets on 10-Year Note Gain
Dave Liedtka
Bloomberg, 2006-08-18 16:36

Thursday, August 31, 2006 | 03:15 PM | Permalink | Comments (15) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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» Bond Bulls from Bear Mountain Bull
BMB mentioned just this morning that it looked like interest rates were headed for zero. Today I was looking at the chart of the 10-year yield, and was doubting that it would ever go up again - it has gone nearly straight down since early July. Then I... [Read More]

Tracked on Aug 31, 2006 3:38:58 PM


The fed will not come off pause - on the tightening side. The pause was a political move and tightening will continue only in the face of overwhelming and blatantly obvious economic data. Which we are not likely to get at least in the short/medium term.

Far as the long bonds - they will retreat once the recently clueless vigilantes realize that they have been had. That the Fed is sacrificing the value of money on tha altar of housing.

Stagflation anyone? Commodoties, gold and dollar diverfication anyone?

Posted by: Bluzer | Aug 31, 2006 3:42:49 PM

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