Bond market edition.
What they told us at the top (TLT = 143):
July 6 – Wall Street Journal (Min Zeng and Christopher Whittall): “Christopher Sullivan, a money manager in New York, is worried that when he needs U.S. Treasury bonds one day, he might not be able to get them… A buying spree by central banks is reducing the availability of government debt for other buyers and intensifying the bidding wars that break out when investors get jittery, driving prices higher and yields lower. The yield on the benchmark 10-year Treasury note hit a record low Wednesday. ‘The scarcity factor is there but it really becomes palpable during periods of stress when yields immediately collapse… You may be shut out of the bond market just when you need it the most.’”
What they’re telling us now (TLT = 119):
November 16 – Bloomberg (Sarah McGregor): “China’s holdings of U.S. Treasuries declined to the lowest level in four years, as the world’s second-largest economy runs down its reserves to support the yuan. The biggest foreign holder of U.S. government debt had $1.16 trillion in bonds, notes and bills in September, down $28.1 billion from the prior month… That’s the lowest level since September 2012. The portfolio of Japan, the largest holder after China, fell for a second straight month, down $7.6 billion to $1.14 trillion. The Treasury holdings of oil-producing Saudi Arabia declined for an eighth straight month, to $89.4 billion.”
December 1 – Reuters (Trevor Hunnicutt): “Investors pulled $4.1 billion from U.S.-based taxable-bond mutual funds, the most since June, as a bond selloff forced interest rates higher and rattled investors, Lipper… showed… ‘Investors are pulling the trigger and are starting, maybe, the rotation out of bond funds,’ said Tom Roseen, head of research services for Thomson Reuters Lipper. Municipal bond funds continued to be punished as well, losing $2.1 billion to redemptions. Investment-grade corporate bonds posted $1.3 billion in outflows during the seven days through Nov. 30.”
Proving once again that news doesn’t drive markets; markets drive news.
So what are the charts telling us? Following the “panic” top of mid-2016 (Chart 1), we should expect full cyclical reversion to 3.4% yield on 30-year Treasuries, probably in mid-2017 (Chart 2). Extreme money flows, however, suggest an interim bounce from current levels (Chart 3).
On balance, then, it’s okay to add duration here… but save some powder for further weakness in 2017. And please take today’s news with a pinch of salt. The job of the market is to discount tomorrow’s news. Today’s stories have little value, except from a contrarian perspective.
Chart 1. Important tops are made of this
Chart 2. Important bottoms are made of this
Chart 3. Swing bottoms are made of this