Tuesday, September 8, 2009

US bond market poised to rally

James Carville, advisor to then president Bill Clinton, famously said that he wanted to be reincarnated as the bond market so that he could intimidate everybody – that’s because the bond market is usually right.

So what is happening with the bond market?

Large speculators are in a crowded short
The CFTC's Commitment of Traders report shows that large speculators (read: hedge funds) are either in crowded short or near crowded short positions in the 10-year and the long bond. The chart below shows the net position of large speculators in the long T-Bond futures contract. Readings were in a crowded short and there has been some minor short covering.

Coincidentally, long bond yields have fallen through a support line and bond prices have begun to rally.

In the 10-year, large speculators remain in a crowded short.

…and yields are sitting right at technical support.

These sentiment readings are evocative of a stretched rubber band ready to snap back. You don’t often see crowded long or crowded short positions in futures contracts. The dual crowded short readings in both the 10-year and long bond are even more rare and confirm my belief that the bond market is poised for a tactical rally.


market folly said...

Good post Cam, very prudent to watch these levels. We track hedge fund portfolios on our blog and have noted the amount of funds that have entered curve steepeners and steepener swaps. Additionally, there are a bunch of funds betting outright on inflation anyways.


keithpiccirillo said...

I went back and re-read your thorough June article on Julian Robertson Jay.
We do overlook the bond bullies.
Nice catch, showing via charts and finding this possible near term move.
No 2X (TLT) for me with all the decay, but I may buy some IEF or TLH.
It looks like those betting monies against bonds are getting tired of idling, waiting for inflation. Thanks, Dr. Hui.

Cam Hui, CFA said...


Just to set the record straight - I don't have a Ph.D.