Thursday, August 29, 2013

Bond Crash is coming, will crash other markets as well

We have warned here more than a year ago that the bond bubble was finished. So, there was ample of time even for slow-moving institutions to get out of this asset class.

Now the long term trend in long bonds has started to turn down, a prerequisite  for a crash sooner rather than later (Memo: markets that have not already lost momentum usually just don't crash out of the blue - but this market has already turned now).

It might be that geopolitical jitters around Syria might hold this development up a littlebit, but the inherent weakness will remain. As soon as Bond Futures push meaningfully through the current key support zone, we should see accelerating selling.

This will most likely be poison for most other asset markets, and could also crash the still overtexended equities.

Of course, after a little while, central banks will have to step in and try to save the day - as long dated interest rates are the fulcrum that could move the entire artificially calmed asset spectrum from stability to considerable chaos.

The only question that remains is, where has the Fed drawn its line in the sand: 121 ?  120 ? 118? 112? (referring to the 10 year T-Note Future).

So if there is an accelerating selloff, and if the Fed moves somewhere around 112 to 120 in force, that could provide for anotther powerful (albeit temporary) buying opportunity that could trigger another wave of levitation to stocks.  But it will be medium-term temporary in nature.

Meanwhile, we have developed a disciplined and broadly-based systematic approach to manage directional bond risk for institutional investors, providing an Overlay for existing bond portfolios by tactically and directionally shorting 10-Year Treasury Note Futures and/or 10-Year Bund Futures.

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