Bonds 01 (May 08 - Aug 10)

Re: Bonds 1 (May 08 - Aug 10)

Postby winston » Mon Aug 02, 2010 6:09 am

Weekly Review

Bonds. With the weaker economic data, bonds had a great session. They sold off all week down to a support level and gapped higher on Friday. They showed some life on Thursday and even Wednesday as they bounced. On Thursday they sold off but recovered. Friday they gapped higher (10 year US yield 2.91% versus 2.98% Thursday).

These were spectacularly huge moves. Again, worries about the US economy sent investors into US treasuries. Those are domestic investors, not necessarily the foreign investors because the EU data was still decent during the week.

Although some of the EU data on Friday was not so great, so we may have seen some European dollars helping to bolster Treasuries (at least for the day).


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Re: Bonds 1 (May 08 - Aug 10)

Postby winston » Mon Aug 09, 2010 10:26 am

Weekly Review

Bonds. With the economy looking weak, bonds looked strong. There was a gap higher. That has been a seesaw battle actually a seasick battle as it gapped daily back and forth. Friday the gap was to the upside because of the weak economic data (10 year US treasury 2.82% versus 2.90% Thursday).

The 2 year broke 0.5% for the first time the history. It did manage to close at 0.51%, so thank goodness we can all sleep easily tonight. You see the issue. The problems with the economy are driving US investors into US Treasuries. It is not driving any of the foreign buyers there, however.

The perception is that Europe is doing a lot better, so all the Euro that flew into US Treasuries have left. Now it is good old' Americans buying US debt out of fear that equities will not be able to sustain that move to the upside.

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Re: Bonds 1 (May 08 - Aug 10)

Postby kennynah » Mon Aug 09, 2010 3:42 pm

looks alright...

******

August 2010
Date...... 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
08/02/10 0.14 0.16 0.20 0.28 0.56 0.85 1.64 2.35 2.99 3.82 4.06
08/03/10 0.15 0.16 0.20 0.27 0.53 0.80 1.55 2.27 2.94 3.78 4.04
08/04/10 0.15 0.16 0.20 0.28 0.56 0.86 1.62 2.33 2.98 3.81 4.07
08/05/10 0.15 0.15 0.19 0.27 0.53 0.81 1.57 2.28 2.94 3.78 4.05
08/06/10 0.14 0.15 0.19 0.25 0.50 0.78 1.51 2.21 2.86 3.71 4.00
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

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Re: Bonds 1 (May 08 - Aug 10)

Postby winston » Thu Aug 19, 2010 9:48 pm

The Bond-Market Rally Is Going to End Badly By Jeff Clark

Interest rates were at historic lows entering 2010. Everyone was bearish on bonds. After all, interest rates just had to go higher in order to attract purchasers to fund the ever-increasing deficit spending in the U.S. The "no-brainer" trade of the year was to short bonds.

Indeed, the vast majority of financial advisors and hedge funds were positioning clients to profit on the inevitable decline in bond prices (and subsequent rise in interest rates).

It was a logical trade. It made perfect sense to me. The problem, however, was the trade was just too popular. It was too obvious. Logic dictated interest rates had to go higher and bond prices had to go lower. It was too easy.

Easy trades never work.

The market never lets investors make money on an easy trade. So even though logic dictated otherwise, the sheer popularity of shorting U.S. Treasury bonds meant T-bonds would surge even higher. And they did.

Yields on the 30-year T-bond have dropped from 4.7% at the beginning of the year to just 3.8% as of last Friday. Prices on the 30-year T-bond have surged from 115 to over 131 – a gain of 14% in just over seven months.

That's insane.

But it's a perfect illustration of what happens when everyone lines up on one side of a trade. Logic takes a backseat. Popular trades often capsize under the weight of their popularity. Price action inevitably goes the other way, forcing losing investors to cover at a loss and pay up to get in on the other side of the trade.

Now the popular trade is to buy U.S. bonds. The Fed is beginning a new round of quantitative easing, using principal payments from its mortgage-backed securities to pump up the price of Treasurys. So with the federal government acting to keep bond prices high, investors feel secure buying bonds at current levels.

They're nuts.

The risk/reward setup for buying Treasury bonds at current prices is out of whack. As prices rise, yields fall, and the risk of owning bonds increases.

Think about it... T-bond buyers are putting up $1,000 in exchange for receiving just $38 per year of income. If bond prices merely retreat back to where they were at the start of August, investors will lose 4% of their principal value. That's more than an entire year of interest lost if the bond market gives up two weeks of price gains.

If prices fall back to where they started the year, investors are looking at a loss of nearly 14%, or almost four years of interest. It's hard to justify buying Treasury bonds when you're looking at that sort of risk.

Logic argues against it.

Yet, the buying binge continues. Now, it has reached "bubble" territory. Take a look at this chart of the 30-year Treasury bond...

Bond prices have gone parabolic. They're now higher than they were in March 2009, when investors were fleeing the stock market and seeking the "safety" of government bonds.

This bond market rally is going to end badly. And it's going to end a lot sooner than most people think.


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Re: Bonds 1 (May 08 - Aug 10)

Postby winston » Mon Aug 23, 2010 7:13 am

Weekly Review

Bonds have been on fire. There was a gap higher this week, clearing this consolidation range, and surging to the upside.

The 10 year was off on Friday after a tremendous run (2.61% off from the 2.57% on Thursday), but it was trading at 2.55% premarket. We made a lot of money off the TLT as it surged to the upside.


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Re: Bonds 1 (May 08 - Aug 10)

Postby winston » Wed Aug 25, 2010 8:23 pm

Why Are You Buying a Stinkin' Bond Fund Now? By Dr. Steve Sjuggerud
Wednesday, August 25, 2010


You're guilty… You're busted.

But it's not just you… Everybody is doing it. Everybody is buying bond funds.

As I'll show you, this is incredibly foolish.

First off, I know what you've done… I know 98% of the money that's flowed into the Franklin Templeton funds this year has gone into bond funds. The trend goes back farther…

For the last 30 months in a row, inflows into bond mutual funds have topped inflows into stock mutual funds. And the totals are just ridiculous… $559 billion has flowed INTO bond mutual funds in the last 30 months, compared to a $233 billion OUTFLOW from stock funds.

So you've sold your stocks and you've bought bond funds. But why?

Look, as I write, 10-year government bonds pay 2.48% interest. Meanwhile, the average bond fund charges 0.61% in annual fees. Think about that…

Right off the top, you're giving up 25% of the interest you'll earn to the bond fund manager. Why would you do that? Next, think about this: The BEST you can earn in interest in that bond fund is less than 2%. But the WORST case is really bad…

If interest rates happen to rise from 2.5% to 3.5% over the next 12 months, your principal (the amount you invested) will crash in value. A $10,000 investment would fall to $9,200. If interest rates rose to 5%, your principal value would crash to $8,200. Those numbers don't include any fees… That's just basic bond math.

If you held an individual bond, you could hold until maturity, and you'd be OK… you'd get your $10,000 back. But not in a bond fund… The bond fund manager may well sell losers at a loss, year after year. If interest rates go up year after year, bond fund losses will keep increasing year after year.

Do you really want to lend money to the government and earn less than 2% interest? Do you really want to have the risk of your principal (your initial investment) getting eaten away from both fees and potentially higher interest rates?

The miniscule interest is not worth the horrible risks.

Consider the early 1980s versus today: In the 1980s, when interest rates were in the high teens, nobody wanted government bonds. They were considered "certificates of confiscation." Investors were fearful. They weren't willing to accept 15% interest rates from the government, because the national debt was fast approaching $1 billion, which was one-third of GDP.

Today, with interest rates of 2.5%, investors are flocking to bond funds. Meanwhile, the national debt will hit $15 trillion and reach 100% of GDP next year.

Go figure.

Investors are scared of stocks… They haven't made any money in stocks in over a decade. Meanwhile, stocks are the cheapest they've been since the late 1980s.

You want to buy what's cheap and sell what's dear. That's how you make money investing.

Stocks are cheap. Meanwhile, bonds are dear. So what are you doing buying bond funds?


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Re: Bonds 1 (May 08 - Aug 10)

Postby winston » Mon Aug 30, 2010 7:56 am

Weekly Review

Bonds. The strongest indicator of all on Friday was the bond market. Wednesday I noted the gap and reversal, and we took a big chunk of our TLT gain off the table (somewhere around 250% on the options).

Thursday it tried to move up again on a little fear, but on Friday there was no fear. The bond market sold off sharply (US 10 year 2.64% versus 2.48% Thursday). We took the rest of our TLT (what little we had) off the table, banking that gain.

Bonds as a fear play suddenly lost the fear aspect. That is a key piece of the puzzle I am looking at. The stock market is holding the bottom of its trading range, and bonds have been shooting higher as the stock market sold off into the bottom of its range.

On the SP500, it is selling in August while the TLT has been rising in August. Then, suddenly, a massive reversal. Bonds all of a sudden do not look so great. They will fill the gap from mid August, but the question is whether they break below the June and July peaks.

We sold out. Bonds are not having the fear money put into them. Remember, the bonds market is a very good indicator of the economic future. They have been racing higher, and that had me very concerned about what was going on. That was mitigated somewhat by what the stock market was doing.

If bonds sell off and interest rates rise, even if the Fed says it will help out, you can read that to mean bond traders are perhaps seeing improving economics. It could also be seeing more inflation down the road.


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