In a Jun. 20 post, it was argued that the long Treasury price was "steaming toward an overbought."
And it got there, registering a major intermediate term overbought. Now, there is a flip side, with
the TLT long Treasury ETF having just sold down to a deep intermediate term oversold.
Bond price directional fundamentals began turning negative in early 2016. The deterioration has
been mild but persistent. Absent has been the strong production growth and heavier resource
utilization that puts hefty upward pressure on inflation and galvanizes the Fed into tougher
restrictive action. With only nominal cyclical pressure, bond players ignored the warning signs
and bid Treasuries sharply higher into early Jul., ending the run with what appears as a blow-off.
The market has trended down since, and has recently tumbled as bond traders have come to
believe that Trump's election will involve heavy fiscal stimulus that will accelerate real economic
growth as well as inflation, and will also result in a large increase in deficit federal financing,
with the Fed to follow by pushing short rates higher.
These new concerns could all turn out to be true, but if so, their realization will take considerable
time and may not be strongly evident until 2018 at the earliest. In the interim, questions are bound
to arise about whether the Trumpistas can pull their fiscal program off and whether other initiatives
from The Donald on trade and immigration may work as growth deterrents. This leaves the question
open whether the current stampede out of bonds will overdo it by enough of a margin to produce
an eventual counter-trend rally in a heavily oversold market.
Near term, TLT is moving toward a respectable support level down around 115.
Whatever, bond players might do well to begin to try and factor a volatility premium into
their pricing models to account for an apparent reduction in primary dealer market making
capability as a result of post 2008 financial system regulation.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!