Bond Markets

The long Treasury closed under 4.3% today. This market is
now getting seriously overbought. The Marketvane index of
bullish advisories on Treasuries has reached 77% and is
trending up. As a contrarian reading, 77% bulls is signaling
an eventual rebound in yields (and lower prices).

The strong rally in Treasuries since this summer reflects
prospects for a slowing economy and a strong flight to quality
from riskier assets, especially CDOs of varied stripes. But
yield spreads between top quality and medium quality corporates
are widening, and the high yield market is now once again the
junk market, with yields here jumping from under 8.0% a few
months back to 10.8% presently.

One indicator I watch closely is the industrial commodities price
composite. Broad measures of industrial commodities prices have
leveled off in recent months, a normally bullish development for
bond prices.

I had a nice trade earlier in the year when long Treasuries were
oversold, and now I am looking carefully at a short on the Treasury
price. I am also getting intrigued by the junk universe, which
is deeply oversold. Yields above 10% are attractive for risk capital
since you have a shot at a 10%+ annual return for the risk taken.
So maybe there is nice long / short trade coming up. (I rarely hold
positions in bond trades past 2-3 months.)

I regard Treasuries as fundamentally unattractive for investment.
Investors are not being adequately compensated for inflation and
interest rate risk, nor are they being compensated for the vagaries
of the offering calendar in the years ahead. Flip the coin and you
could make a good argument for offering long Treasuries to the
market to lock in these yields.

For the long Treasury price ($USB), click.