Is This It For Bonds?

There's a lot of pessimism out there in the bond market, specifically US Treasury Bonds. Is this it, should we all just assume that rates rip from here and bond prices see another leg down? Prices of bonds are hanging out near multi-year lows and the bearishness seen across the bond sentiment and bond allocation polls is off the charts.

Back in September, I was one of the biggest bond bulls out there. I loved them when no one else did. I expected decent rally but instead got little mini-rally. It was very disappointing. There was a big jobs report the morning of November 8th, and bonds got killed. That day I said that something changed, and I was no longer a bond bull. If the data changes, you change your strategy right?

Well over the last 5-6 weeks or so, bonds have consolidated nicely. They haven't gone lower, but haven't rallied either. They are possibly setting up for that rally that I expected in August/September, or they are about to take a massive leg lower. Here is what the $TLT looks like, representing the longer end of the curve:

I like the fact that momentum is trying to turn up as prices try to hang on to this key support. The line in the sand to the downside is clear.

Here is a longer-term weekly chart showing how much more downside we can see in bond prices if these lows cannot hold:

Based on the combination of the constructive action in Bond prices over the last 4 months and the extreme pessimism in the space, I find it hard to be short right here. To me, crashes don't come when everyone expects it. Now, when you factor in the weekly chart, it is easy to see how much down side there can be in bond prices. A break below these current lows for more than a day or two, and we could be in store for a huge leg lower.

Personally, I'm looking for opportunities on the long side, at least for now. There is an FOMC meeting this week, which could set the stage for the next move. I doubt either way that it will be a small one. So if you're looking for action, this might be the place over the next couple of months.

Tags: $TLT $ZB_F $TNX