bonds – Andrew Thrasher

Stocks and Bonds Appear to Be Best Friends

Posted on May 2, 2013 by Andrew Thrasher, CMT

It’s interesting the way different markets relate to one another. Typically Treasury bonds aren’t the best friends of stocks, moving in opposite directions most of the time. There have of course been periods of time where the two have worked out their differences and advanced or declined with one another. When this happens we begin to notice a divergence that takes place between yield and equities. Since mid-March yields have been falling while stocks continue to head higher. Bonds are often considered the ‘smarter asset’ compared to stocks and when yield isn’t mirroring the move in risky asset classes it typically raises a red flag for stocks. However, this hasn’t been the case so far this year.

Even though stocks have been hitting new highs, it has been bond prices that have been the outperformer over the last couple of months. One note regarding this couple is the momentum between the relationship of the S&P 500 ($SPX) and 30-Year Treasury Bonds seems to be waning. The RSI indicator is just about down right depressing as it makes lower highs. This type of momentum divergence has been present during just about every intermediate equity top. But none of this matters until price confirms. While it’s concerning to see the S&P overshadowed by bonds during this rally, it only becomes important when the Mr. Market says so.

Yields continue to fall and the correlation between bonds and stocks continue to rise. Over the last 10 years the 60-day correlation between the S&P 500 ($SPX) and 30-year bonds has only been this high nine previous times. So what does this all mean? It means investors have not been shifting out of bonds and the ‘Great Rotation’ is not necessary underway. Whether you chose to blame Bernanke, Japan, or your Uncle Bubba – stocks and bonds are now best friends. It’s unlikely this courtship will last forever, normally it’s the bond boys that win out, we’ll see if this time is any different.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

No One Seems to Own Bonds, Should You?

Posted on February 12, 2013 by Andrew Thrasher, CMT

Okay I get that bonds have been in a bull market for over 30 years now and so it’s become the ‘cool’ thing to be a bond bear lately. But it looks like everyone has thrown their hat in the ring to be a hater on Treasury bonds. Over the weekend Business Insider published the results of a BAML survey of managers in regards to their Treasury holdings. The results of the survey found that the majority of fixed income managers aren’t even long Treasury bonds at all.

From BAML via Busineses Insider:

According to BAML strategists Ralf Preusser and Richard Cochinos, 66 percent of investors are no longer holding Treasuries, and 11 percent are thinking of selling.

The two write in a note to clients that with such bearish sentiment toward U.S. government debt, “the sell-off in Treasuries may be running out of steam.”

As we have one source of overly bearishness towards bonds, lets take a look at the actual positions in the futures market for the 30-year Treasury’s. As the COT chart below shows, small speculators (green line) are fairly stretched net-short on a historical basis. With the ‘smart money’ (the commercial traders red line) holding a rather large net-long position in 30-year Treasury’s.

So fixed income managers hate bonds, individual traders (small speculators) hate bonds, and a large percentage of Wall Street strategists have come out against bonds. Whose left to sell bonds? I’m not here to take a stance on the whole ‘Great Rotation’, I’m not a bond expert and I’ve never played one on TV. What I will say is that it appears sentiment is pretty over-stretched at current levels when it comes to the fixed income market. It’s very possible we see further weakness in the bonds and yields continue to climb and the prognosticators may end up being right, but the sellers may need to take a breather to reload before attempting to pump more bullets into the bulls

Source: Tons Of Fund Managers Have Already Dumped All Of Their US Treasuries (Business Insider)

Notes From Jim Grant

Posted on December 5, 2012 by Andrew Thrasher, CMT

I had the opportunity to attend the Indianapolis CFA dinner last night with Jim Grant, the author of the well-known Grant’s Interest Rate Observer as the guest speaker. Grant has been writing his newsletter since 1983 after having a column at Barron’s. Ron Paul had once said that if he were to become President he would name Jim Grant as his Fed Chairman. He’s one of my favorite economists and I was glad to have the opportunity to hear him speak.

Below are the key takeaways from Jim Grant’s speech:

– The Fed is waging war against the invisible hand of Adam Smith.

-This has been the largest example of bad risk analysis ever and it’s happening in our life time.

-Insurance companies are getting screwed as they watch their liabilities skyrocket while banks get to be solvent since they are friends of Bernanke.

-Bonds are the fruit of our sins. They rise based on muscle memory, not necessarily due to their value.

-Bonds are perceived as less risky than stocks, which isn’t always the case.

-Bonds have typically followed a 35-year cycle and are currently mirroring past cycle tops.

-To fund a five-year annuity paying 2% many insurance companies have to go to the junk bond market, which is ridiculous and unsustainable.

-Grant likes to step back and think of how people will view the current environment 10 or 20 years from now. He thinks they will note two things: 1. politicians didn’t notice that there were a few extra houses than necessary in 2007 and 2. people didn’t recognize the 35-year bond market cycle top and that bonds were in their last gasp.

-The Fed has beaten deflation and will act like a drug dealer as they sell bonds in the oncoming bond bear market.

-The U.S. economy is an idling race car that’s been improperly maintained.

This was the first time I got to hear Grant speak in public, he’s a good speaker and actually is pretty funny. He is, as the points above show, very bearish on bonds but admits that he’s felt this way for a couple of years now and it hasn’t played out the way he expected. He said he does own physical gold but does not manage his own personal wealth, outsourcing its management to a few hedge funds.