Bond Rally Looks Crowded and Tiring

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

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What's been said:

Discussions found on the web:
  1. Bear Mountain Bull commented on Aug 31

    Bond Bulls

    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…

  2. Bluzer commented on Aug 31

    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?

  3. Cherry commented on Aug 31

    My prediction:

    NPR reports comes back ugly, jobs unchanged, unemployment up to 5.1% as lazy home ATM “labor” continues coming back into the labor force looking for work, beginning of housing layoffs cause 10 year to tank down to 4.50%, causing a major inversion of the yield curve. The stock market goes wild with a 200 point rally into labor day weekend nearing record highs(as far as points be concerned).

    Now how about that for a prediction!

  4. Lyon commented on Aug 31


    I agree……this continues to the 4.30% level. Then lower.

  5. Mike B commented on Aug 31

    I’m a little confused about the 10 year bond. Does everyone think that during the next US recession, our foreign benefactors will keep up with their US bond purchases as the govt deficit grows while tax receipts decline and spending continues to increase? This looks bearish to me for long term bonds, but I guess the smart money sees something that I don’t.

  6. wcw commented on Aug 31

    Yeah, the PIMCO line is that houring slows the economy, rallying bonds.

    I am not sure I see it, but “Bretton Woods II” hasn’t collapsed yet.

  7. JGarcia commented on Aug 31

    The COT report shows the Commercials still very long bonds, but not as long as May and July. The small speculators are also very long (a warning sign for sure). But with the big long positions by the Commercials, I would be surprised to see a big rise in rates.

  8. peanut commented on Aug 31

    “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.”

    Very good point

  9. Richard commented on Aug 31

    inflationary pressures will not allow the 10-year to rally much. no way, no how. the risks around 4.75% are almost embarrassing to those who have positions. 4.3%? surely you jest!

  10. Craig H commented on Aug 31

    It’s going to be interesting the next few days.

    We have Charles Nenner’s cycle prediction that equities will rally until the end of August then turn down in September. Things may be set up for him to be right once more.

    Major stock indexes are overbought on stochastics and MACD, plus there are bearish divergences.

    New High/New Low ratios (4, 13, 26, 52 week) all at overbought readings over 90.

    Potential double-top on the OEX.

    Gravestone doji on Russell 2000.

    High Low Logic Index spiked in early August then turned down.

    Zweig Breadth Thrust, Mcclellan Oscillator and Summation Index have risen back to same levels they held during early May.

    74% of NYSE stocks above their 40dma.

    61% of NYSE stocks above their 200dma.

    VIX at 12.31.

    Put/Call ratio at 0.90.

    CRB index, gold and oil have bullish divergences on stochastics and MACD and may rally

  11. GRL commented on Sep 1

    Latest comments from one of the founding fathers of the Cult of the Eeyore:

    He does a rather comprehensive deconstruct of the revised Q2 GDP figures. I’d be curious whether BR agrees with his take (and is therefore a bona fide member of the Cult of the Eeyore), or whether there are divergences between the two and, if so, what they are.

  12. Eclectic commented on Sep 1

    Mr. Bond Market goes to a psychologist because of his identity crisis:

    First psychologist (FP) is just out of psychologizing training and is about age 25.

    FP: “Why, Mr. Bond Market, just who do you think you are?”

    BM: “I sort of think I’m bullish… it seems that way, but a lot of people are telling me I’m not.”

    FP: “You can’t be a bull… it’s not possible.”

    BM: “What makes you think I can’t be?… don’t you think I know who I am?”

    FP: “Because all the benefit of my training, experience and background tells me that you’re wrong. If you think you’re a bull, you’re just being silly… I mean, don’t you know what everyone is saying about you?”

    BM: “Training?… Experience?… Background, you say? Ha!… You don’t even know what a ‘Pet Rock’ is, and you’re telling me I don’t know WHO I AM? I want another opinion.”

    Second psychologist (SP) appears.

    SP: “Yes Mr. Bond Market, can I help you?”

    BM: “I’m not sure… say?… can you answer a question for me before we get started: Ever stopped at a gas station and put just $2 worth in?”

    SP: “Are you crazy?… Sorry, I mean… I don’t mean to say you’re crazy, per se…. I mean, not yet at least…. er, that is… you might be, but… well, I’m only referring to the gas question when I say you’re crazy, but Sir, really, why would anyone ever stop at a gas station and just put just $2 worth in?”

    BM: “I think you’ve answered my question already…. No, thanks, but I don’t think you can help me after all… I still want another opinion.”

    In comes a much older psychologist (OP).

    OP: “Hello, Mr. Bond Market… my, my… it’s been a long time since I’ve seen one of your type… Tell me, where’ve you been all these years?”

    BM: “You mean you agree with me?… You think I’m a bull after all?”

    OP: “And, why wouldn’t you be?… Don’t you know who you are?”

    BM: “You’re the first one to tell me that. Well, yeah… yeah… I think I do know who I am. Tell me Doc, what year were you born?”

    OP: “1951, why?”

    BM: “And, so, when was your father born?”

    OP: “Let’s see…. I think it was 1922, but, what are you getting at?… Where’s this going?”

    BM: “Oh, no where I suppose.. forget it… it’s nothing… but I’ll tell you something interesting. I didn’t get above 4.25 until your dad was a toddler, and then I dropped back again and didn’t get above 4.25 until you were about a junior in H.S. Remember those good old days?”

    OP: “Oh, yeah, I do. Say, Mr. Bond Market, do you remember ‘Strangers in the Night’ and ‘These Boots are made for Walkin’? ”

    BM: “Do I!… Are you kiddin’!… Those are two of my all time favorites. I had a 4.25 party, first one in years and years, and we played those records a-l-l night long!”

  13. S commented on Sep 1


    Loved it! Very clever. Thanks.

  14. theroxylandr commented on Sep 1

    I think bond prices are mostly set by 1. budget deficit and need to increase/decrease supply 2. foreign central banks who buy that crap by trillions.

    All those traders on Chikago board do not set the direction, they only guess it.

  15. Eclectic commented on Sep 1

    Dear S,



  16. Guy M. Lerner commented on Sep 3

    I wrote this to subcribers on August 28; this was the second such post over the last month:

    The bond market has moved higher (yields lower) in an obvious response to the future economic slowdown. The 10 year Treasury bond has managed to retrace back to its down sloping 40 week moving average. This also coincides with the breakdown point from the almost two and a half year top. This is also right into resistance formed by several significant down thrusts, and this is also at the upper end of a down sloping trend channel.

    Bond sentiment data isn’t conducive to a move higher as well. The Commitment of Traders data has the commercial trader (i.e., smart money) bearish on bonds. Furthermore, the Rydex asset flows for bonds are at an all time high level; I would interpret this extreme as bearish (at least in the short term).

    Bonds are overbought and hitting up against key resistance levels. Sentiment is bearish for higher bond prices. Lower yields on the 10 year are unlikely as long as the Fed is holding steady on short term rates. Therefore, at best, Treasury bonds should enter a range, and I would be surprised if bonds moved higher at this point in time. Of course, the tailwind of lower yields has helped the equity markets, but now we can add the uncertainty of higher bond prices into the uncertainty of the equity markets.

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