Sunday, January 18, 2015

Bond Bull(shit)?

Long ranty post, here's some nice relaxing Sunday mood music to get you through my post.


Hey, remember the start of 2014 when every mother, father, grandmother, step-son and their goldfish was ultra short bonds?

How did that trade turn out for everyone since then? Negative 31%, oh boy.

Of course if you listened to Bob Farrell's rule #9, you would know that "When all the experts and forecasts agree -- something else is going to happen".

My simple logic is that if everyone is one the same trade, how is it possible that everybody makes money?

And it is a simple tweet with that simple logic that is making me question my position in bonds.

It is not just sentiment in bond that is at extremes, a technician has also pointed out that based on price channels and PPO, this recent rally in bond is pretty extreme.

Northman Trader also showed that previous impulsive moves into the bond market had subsequent reversals. Is another one coming?

Well, I don't want to stick around to find out. Based on historical research that Market Anthropology has done, they think that the move in bonds has been mostly done. I can settle for most. I don't assume I can catch tops and bottoms, most is good enough for me.

 (OT) Another bond related topic is about the cheapness of TIPS now.

However, after reading a summary of Jeff Gundlach's 2015 Market Outlook, I am skeptical of TIPS.
He still feel that Treasury inflation protected securities (OTC:TIPS) are for losers because near-term inflation expectations are actually pointing towards negative trends. He did note that they are cheap on a relative basis, but the overriding argument to own them is flawed in this market.
The bullish scenario for TIPS is the relative cheapness, which Gundlach demonstrates he is clearly aware of. TIPS could outperform long bonds, but that may be because long bonds ease off on their stellar performance.

Gundlach is a brilliant man. Not only does he look badass with that sexy goatee, he is a great manager and I think he is one of the few no-nonsense, no-bullshit people around in the industry. He doesn't give views to conform, he gives his views straight up, whether you like it or not. Perhaps that is why he has been such a fantastic manager. I don't agree with everything that he says (long USD trade), but when it comes to bonds, this man knows his shit and I give him the benefit of doubt. I'm tapping out of TIPS.

All these sounds like fantastic reasons why bonds (does not specifically include TIPS) may no longer continue their fantastic upside moves anymore. However, if it is so clear and obviously, then I suppose it is obviously wrong. I have one fantastic counter argument about why bonds can go higher, and it's a pretty good one.

An unwind of those short positions should technically push yields lower, since bonds have to be bought to cover their positions, making them bid and killing yields. However, mid 2010 we did see an unwind, however yields went up 100bps instead. Therefore this isn't the most exact indicator, but I still think that it is a good one nonetheless.

My last counter-argument is the inconclusive ratio of SPY:TLT.

This merely indicates that TLT may be outperforming SPY in the future. A possible scenario is that the SPY crashes while TLT also corrects. Loss in trust of the financial markets, doubting the safety of US treasuries, a USD currency crisis, inflation or any combo of these could result in a lower ratio going forward, but also with TLT not doing well.

Piecing everything together, after seeing the mega gains of TLT in 2014, lots of optimism in bonds and similar levels of historical rallies, I have decided to stay out of bonds. I feel that my anti-thesis of bonds going higher with the short positions and the SPY:TLT ratio is weak compared to the bearish scenario.

Translated into action, I have cashed out most of my unit trusts related to bonds. Also, in light of the TIPS revelation by Gundlach, I also closed out my TIPS position. As I am already aggressively positioned in precious metals and miners, I think I have got the inflation trade much more well covered.

Overall I am positive on my closed bond positions and I am capital recycling. I am thinking to either build my cash hoard, cherry pick some SGX stocks or to plunge into Russian equities again. Choices, choices, choices.... So many opportunities, so little time, so little money!

No comments:

Post a Comment

Observe the house rules.