The demand for Treasuries picked up a bit this month. But that bit wasn’t enough to send yields lower.
Part of the problem is that dealers have been mispositioned and have not been buying as many Treasuries as usual. A similar process occurred in 2008 when the dealers were positioned wrong. Their mispositioning either caused or exacerbated the financial crisis.
Foreigners have also cut back. As they converted dollars from their sales of Treasuries back to euros and other currencies, their central banks recycled those dollars back to the US. Despite that cash being recycled back into the Treasury market, yields still rose. Other investors were rotating out of bonds and into stocks.
Except for the early February crash, declining effective investment demand has yet to be felt in stock prices. As the Fed continues to drain funds from the system and demand is thereby weakened, we will see more downdrafts in stocks.
Watching the Treasury market, the 3% level on the 10 year yield is obviously critical. It may take a while to clear that level, but once it’s broken, the pressure on stocks should grow.
More Treasuries Means More Pressure on Stocks – and More Short Opportunities
As the Fed shrinks its balance sheet at an accelerating pace over the next year, it will cause both an increase in Treasury supply, and a reduction in the cash available to absorb that supply.
Since bonds and stocks compete for available investment funds, it’s not good news for stocks either. There has been enough cash and speculative leverage around to support a rally in one market but not the other. Stocks have continued to rise, while bonds have faltered. This data won’t tell us when stocks will turn down. It can only tell us that it will happen within the foreseeable future. We’ll leave the timing to technical analysis, covered in my Wall Street Examiner Pro Trader market updates.
Under the circumstances, any rally in bonds would be a selling opportunity.
If you’ve been following my colleague Shah Gilani at Zenith Trading Circle lately, you’ve seen some extraordinary short opportunities already… like a 995% gain on KR puts. He’s notched 20 triple-digit winners and counting over the past several months, many of them on overlooked short opportunities like KR in the retail sector. Shah has a perverse genius for finding bearish trades, especially now that the downturn has begun….
Here’s his latest short retail play…
Have a great weekend!