What’s Wrong With This Credit Card? (by Goatmug)

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I'm pretty much the last guy in the world to expect an implosion in long dated treasury bonds, and this week has really been amazing to watch long bonds get smacked around.

In the past, I stated strongly that treasury bonds weren't going anywhere and in fact we'd see 30 year mortgages at sub 3% levels.  I still believe that the Fed will fight and fight to keep rates low as they don't have any choice but to purchase their cocktail of MBS, and mixed treasuries, or else the whole US economy my tank (isn't that what they say every month?).  This week, Tim made a great post with a very bearish call on bonds.  I was bold enough to post a picture of TLT and suggested that a gentleman's bet was in order and that we'd see $130 on TLT before we see his number of $100.  Could either happen?  Of course, but I also suggested that Tim would get some quick confirmation and that it would reinforce that he was correct in the short term, but this would only serve to make his beat down more painful, and ultimately he'd have to hand over my dollar.

Anyway, the biggest move that I am concerned about in terms of the longer term stock market is NOT the move in the 20 Year Treasury all by itself.  No, the issue is the recent strange action in the spreads between different types of bond maturities and also different fixed income assets like emerging market bonds, treasuries, and even high yield bonds.

Examine some of these relationships and take note that credit often signals big bad moves while the stock market happily rockets up 150 points on a crappy jobs report.  Bonds are usually managed by the smart money.  We'll see just how smart they are.

TLT : IEF - 

(This is the ratio between long bonds and 10 year treasuries).  Look at that complete collapse of the spread.  I've put the SPX behind it for you in black.  In this market environment, even though treasuries are seen as a quality safe place to hide in a panic, investors will shun the 20 and 30 year bond, they will all cram into the 10 year.  The IEF is gaining traction relative to the TLT (20 year).




Here is another one that Michael Gayed uses.  I follow him on twitter;

EMB:TENZ (Ratio of Emerging Mkt bonds to a ten-year bond eft)  This one is good, because the drop in the ratio often indicates a flight to quality.  It also leads many of the drops in the SPX which is behind in black.  I've circled the recent action where the ratio is falling hard, but the SPX has just powered higher.  Which is right?




Finally, here is the TLT chart I posted on the Slope comments section.  TK looks like he's in the money……for now.

As usual, we'll hold our breath and wait for the equity market turn.  At least the credit markets have begun to show there may be trouble brewing in paradise.  Have a great weekend!



