• 657 days Will The ECB Continue To Hike Rates?
  • 657 days Forbes: Aramco Remains Largest Company In The Middle East
  • 659 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 1,058 days Could Crypto Overtake Traditional Investment?
  • 1,063 days Americans Still Quitting Jobs At Record Pace
  • 1,065 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 1,068 days Is The Dollar Too Strong?
  • 1,068 days Big Tech Disappoints Investors on Earnings Calls
  • 1,069 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 1,071 days China Is Quietly Trying To Distance Itself From Russia
  • 1,071 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 1,075 days Crypto Investors Won Big In 2021
  • 1,076 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 1,076 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 1,079 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 1,079 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 1,082 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 1,083 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 1,083 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 1,085 days Are NFTs About To Take Over Gaming?
How Millennials Are Reshaping Real Estate

How Millennials Are Reshaping Real Estate

The real estate market is…

Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

Strong U.S. Dollar Weighs On Blue Chip Earnings

Strong U.S. Dollar Weighs On Blue Chip Earnings

Earnings season is well underway,…

  1. Home
  2. Markets
  3. Other

Long Bonds and the Yield Curve

Two weeks ago we said to look for one final rally in the S&P 500 as long as the 1160 level held up. It is not lost on us that once again stocks show they can only rally if long term yields and the dollar are not rising. But this trend should soon come to an end.

Below we feature our "investment nirvana" theme that depicts when investors fear neither stock market losses nor inflation. We represent this by dividing the T-bond by the Vix. Recall that in December 2004 this ratio tested its all time high of 10 seen exactly ten years ago in December 1993. Importantly, the previous top coincided exactly with the Fed's rising interest rate cycle that began in February 1994 after having held rates at 3.0% for 17 months following a rate cutting cycle that began in July 1990 at 8.0%.

Note how there was a final surge in T-bonds as the steepening yield curve reversed direction and began to flatten. Then, when the ratio between the 30-year bond yield and the 3-month money market fell to 2 (30-year at 6% and money market at 3%) the bond market peaked and began to head sharply lower. This coincided with a peak in the Bond/Vix ratio as well. Interestingly, the exact same set up is occuring now in the Treasury bond.

* When the yield curve peaks many traders buy long dated bond and sell shorter maturity bonds. This was the primary reason long bonds rose in 1993 while short-term bonds fell.

Similarly, the T-bond to Vix ratio has retested its all time high of 10 while the yield curve has flattened over the past twelve months. During this time the long bond has rallied while the market anticipates higher rates and has pushed up the the 3-month from 0.9% to 2.46% in less than a year.

The only difference between now and then is that the yield curve peaked and headed sharply lower in October 1992, fourteen months before the Fed first raised rates to 3.25% in February 1994. This time the yield curve did not begin to flatten until the Fed's first rate hike in June 2004.

If we focus only on the turn in the yield curve itself we see that the eight-month rally in T-bonds is identical to the 1993 rally in the sense that it is mainly a result of traders playing the yield curve after it peaked and began to flatten out.

With a Fed funds rate of 2.5% still extremely accommodative there will be ample room to raise short-term rates but little room left for traders to play the curve. Therefore, we should see a substantial decline in the long end of the bond this year as this artificial support for US long-term debt subsides. This provides an excellent opportunity for those bearish on long bonds.

Note: You can read our strategy report on US bonds in this month's issue of Futures magazine.

Moreover, reall that our research report from last week showed that the ratio of shorts to longs held by commercial hedgers, aka smart money insiders, in the 30-year bond reached an all time high in December, eclipsing the high seen in 1998 before bond prices collapsed and occured in conjunction with the all time high in the bond to Vix ratio.

Therefore, we feel that this bond rally is very susceptible to a spill as the yield curve ratio has flattened to 2 - exactly the same point when bonds prices peaked in 1993.

Recent Testimonial for FX Money Trends: "I find FX Money Trends' work extremely helpful. As a macro hedge fund manager I base my success on ideas generated both internally and through external research services: FX Money Trends and its founder Jes Black constantly provide ideas which are based both on very clever fundamental and technical analysis and research. FX Money Trend's intellectual independence makes their ideas precious, never obvious nor "late." - Francesco Clarelli, Italy.

Back to homepage

Leave a comment

Leave a comment