It is time again to look to a fascinating signal from T-Bond futures open interest, one which gives really reliable signals, but only for a fraction of the time. There is a really interesting price behavior that I have noticed in relation to this open interest peak, which I want to share with you this week.
It’s not about the current Dollar & Treasury market safe haven bid, it’s about tomorrow’s confidence in our monetary system.
Are you confident?
Have you asked yourself why Gold remains by far the best performing asset class of the entire new millennium. It’s an undisputable categorical fact, and there clearly is a well established and completely understood reason for this. Monumentally excessive irreversible debt loads can no longer be discharged without necessitating the devaluation of the currency. Due to this certitude, throughout this millennium we have experienced an extended period of extraordinary monetary accommodation which is unprecedented in the modern central banking era.
Who would have thought that you could stow cash away in a safer equivalent (1-3 year US Treasury bonds), keep your principal, add asset value and get monthly income? Well that’s what my primary cash ‘equiv.’ is doing now that the bull fantasy of organic economic growth seems to be coming unglued or is at least getting a righteous adjustment. Of course the likes of SHY could eventually be secondary to a certain pretty, heavy and much reviled elemental relic in this atmosphere.
Since we noted a couple weeks ago that the TIP fund was trying to put in a short-term bottom, it ground around but continued upward. Of course, with the smell of risk ‘off’ in the air, TLT has gone up even better lately.
What I find pretty cool is the inverse nature of TIP-TLT and USD (UUP) in the lower panels. We are still on the potential ‘inflation trade’ (anti-USD) bounce theme but it is safe to say that for it to get going, TIP-TLT would need start climbing. I have some TIP and STIP to go along with SHY as part of my ‘cash equiv.’ but think of it more as an indicator.
One interesting piece of analysis we have featured recently in both our Daily Edition and our twice monthly McClellan Market Report newsletter involves total open interest in T-Bond futures. There are four contract expirations per year, in March, June, September, and December, and total open interest tends to see a peak late in the month preceding each quarterly expiration.
This market is so interesting. I feel like just putting up chart after chart and letting you come to your own conclusions rather than always being so wordy about everything. Here, take in the message of one of the most speculative excesses bred by the Fed’s policy (lust for junk bonds, top panel) and junk’s relationship to what is thought of by the masses as a safe alternative. Let the picture tell its story…
I sold all of my longer term Treasury bonds at the first level of support in anticipation of this bounce in yields. The bonds had returned some good principle gains along with a month or two of dividends. I am wondering now if the bounce in yields is finishing up and maybe the bonds might be favorable again.
The following is one of a wide range of analytical topics covered in NFTRH 293’s 35 pages this week, much of which is straight ahead technical analysis. But the T Bond market is usually central to an overall macro view at any given time. This segment is not meant to provide actionable direction (other than perhaps to prepare for a potential rise in T bonds yields), it is meant to dig into the mechanics beneath the financial markets in an effort to have people consider that there is much more going on with markets than simple nominal TA or conventional fundamental analysis (PE ratios, growth metrics, reported economic data, etc.) can account for.
US Treasury Bonds
Yields on long-term Treasuries have continued to decline in line with our view that was contrary the ‘Great Rotation’ (out of bonds) hype. The [30-year] especially is now close to support and the next play seems like it could be rising yields and declining T bonds.
The 30-year ‘Continuum’ view above makes the simple case that players had to be put offside believing in the ‘Great Rotation’ at 4% yields. The nearly half-year decline since then has now satisfied the chart as yields have come to our 3.1% to 3.2% target range, where there is support.
The first in what I think will be a line of reports that focuses in on themes for deep summer, as da boyz relax, cashed out and sipping specialty cocktails at sunset in da Hamptins. NFTRH 293 is 35 pages of pure focus on US and global stocks, precious metals and the all important Treasury bonds / interest rate markets.
You did not hear about the red dotted line (AKA the monthly EMA 100 ‘limiter’) on the ‘Continuum’ anywhere else at the height of the Great Rotation Promotion. Just here; though I recall Jeff Gundlach remaining firm on T bonds in the face of the hype. Now the herds pile into T bonds as risk starts going ‘OFF’ (as so many indicators have hinted could happen).
Ah, but there is a support level we have had on radar since the yield topped out. I already sold TLT (20+ year bonds) and will probably do the same with IEF (7-10 year) shortly, keeping bonds in the 0-3 year range (come on Janet, end ZIRP). TLT is getting over bought and the momo herd is in motion running from stock market risk into T bonds. Unsavory characters they are, with little moral compass and even less common sense.
Also at some point, another risk ‘OFF’ asset is probably going to find support, bottom out and lead a coming phase. We’ve got a 2014 Macro Pivot theme in play after all. First the gold bug leaders have to finish getting debunked and strung up by the true believers.
Among its 29 pages of high quality market analysis, this week’s NFTRH (#287) reviewed the Commitments of Traders (CoT) structures of a few markets and their implications.
The above CoT graph clearly shows that gold has declined as the structure improved (red arrows). It then bottoms with the circled extremes and rises in conjunction with a degrading structure (green arrows). Gold is still on its journey toward bottoming.