December 9, 2008
I will probably end up looking really stupid,
but I still see Treasury Bonds trading a LOT higher...
A few notes as to why...
Yesterday it hit me that bonds are on their highs and NOBODY is screaming "BUY!"...Bonds typically keep going until you can hear every analyst there is, who are seemingly never long when they should have been, suddenly get wildly bullish...which again, is certainly not the case yet. Quite the contrary, my perception is they are all still looking for the top...just as they have been for over 25 points now.
I have also become aware there is a lot of talk about a "bubble" in bonds...Every time I've seen people talking about a "bubble" in any market, it was either well before the top or long after it...In other words, if all the talking heads are talking up a "bubble in bonds" right now, it probably ain't one...Bonds are just on their way higher and none of those guys own them.
I have clients calling me every day asking "Where do we short bonds?".
I, myself, last week made the easy, and seemingly logical, assumption, "They've gone up so much, they must be done on the upside." I think I was wrong.
What is happening now reminds me of the 1986 bull market in bonds (which was the greatest ride I ever had in them)...where they are going truly straight up and everybody in the world is trying to short them...and they just keep going and going and going (see chart below).
My own mortgage company is calling me and sending express mail letters imploring me to dump my 6.25% fixed for a 5.75% mortgage, at no cost to me. Several of my clients have had the same happen to them...I have long understood (or believed) that when lenders are on the phones looking for borrowers, it means demand for loans is weak, and to attract borrowers, they have to lower the cost of their product, meaning cheaper money or lower interest rates (conversely, when they have everybody beating down their door to borrow, they will charge a higher rate). My guess is that demand for money, specifically right now as we head toward the Christmas break, and with everybody scared to death about anything economic, is just about NIL...In other words, nobody is out there shopping for a house, nor will they be until at least mid January...Therefore, as regards the rate markets, we are at a point where during the next 4-6 weeks mortgage rates could fall through the floor as lenders take rates lower and lower looking to attract borrowers...And that 5.75 rate my own mortgage company is offering me could easily end up, I firmly believe, at 4.5%...or even lower.
If this is like some bull moves I've seen in bonds, it sounds crazy, and I may be dead ass backwards about this, but I believe they could be 8-10 points higher in no time at all...by which I mean as quickly as within two to four weeks.
It may be lunacy, but I started getting long again today...With options priced through the roof, the only way I can find to do it is by just buying futures, putting stops in, and hoping it doesn't immediately explode in my face...so this trade is not for everyone. And this is not a trade I'm willing to ride to hell and back before it works...If it backs up too hard, I will just walk away from the idea (I think).
Give me a call if you are interested...