Many of you remember the old Warner Bros. cartoon series, Looney Tunes – specifically the slapstick episodes involving the hilarious duo, Wile E. Coyote and the Road Runner.
Despite this record financing of securities purchases, Treasury prices have barely rallied at all. There’s simply too much supply. Much of the increased financing has been diverted into the stock market.
The increase in leverage driving the stock market rally raises the risk of a disorderly denouement. The longer this goes on, the more dangerous it becomes.
Not Even the Newest Character in Town Will Show You Sympathy
Meanwhile, the new sheriff in town, Jerome Jerry Jay Powell, isn’t showing any sympathy. The Fed will continue to tighten the screws until the market breaks.
With Treasury supply steadily increasing, and cash in the system falling, eventually bond prices must fall. Overleveraged dealers will be forced to liquidate. We know what happened when dealers were positioned wrong in 2008. Apparently, nobody learned the lesson of history.
Only the timing is in question. Under the circumstances, the correct strategy would be to hold T-bills, which will be increasingly rewarded, and get out of long term paper.
Aggressive traders could short bond ETFs or buy inverse Treasury ETFs on a yield breakout.
However, there’s little to be gained by being early. The bond rally may yet have more life, particularly if the 10 year yield ends the week below 2.80.
We’ll need to keep an eye on the bond market for technical indications of the time to go short.
Ditto for stocks.