Bonds Slice and Dice

From the Desk of Ian Culley @Ianculley

Don’t catch falling knives!

It sounds simple enough. But in reality, traders continue to lose fingers as they reach for downtrending assets.

Diving after downtrends isn’t one of my many afflictions. But I do have a theory…

Traders and investors don’t realize they're catching a falling knife in the moment. They believe they’re bargain-hunting.

So if you’re one of the many investors out there mending fresh wounds this week, I want to make one thing clear…

Bonds are a falling knife.

Check out the chart of the 30-year T-bond:

Do you really want to buy this chart?

Sure, the downtrend is stretched and ripe for some mean reversion. But as long as it’s below 127’23 we’re short with a target of 116. 

It’s the same story with $TLT:

I can’t buy a chart that’s breaking down to fresh 8-year lows. It doesn’t make sense to me.

If and when it reclaims the 101.50 level, we can talk about a potential mean reversion trade. But even then, we’re trading against the trend.

I’d rather see some sort of tradeable low similar to the multi-month reversals in 2011 and 2014, or the multi-year base completed in 2019. 

For now, our outlook remains bearish with a target of 88.

But bonds are so cheap right now!

You’re absolutely correct, and this is the chart for you:

No matter where you look, new lows dominate the bond market. That’s not a good reason to step in and start buying.

Remember: The best remedy for low prices is lower prices.

If you’re one of the many traders that likes to grab for a good falling knife from time to time, take bonds off your buy list. I’ll let you know once they hit the ground and are safe to handle. I prefer to pick them up off the ground and throw them on the floor until they bounce back and cut me.

I have a tendency to press shorts well after I should just feed the ducks and move along. It’s one of the many faults I need to monitor as I trade.

We all have them.

If you’re just starting to realize some of your bad habits – don’t worry! It’s all part of the process. 

We’ll help you figure it out.

Countdown to FOMC

Following the Fed's 75-basis-point increase last week, the market is pricing in another triple-hike in November.

Here are the target rate probabilities based on fed funds futures:

Click the table to enlarge the view.

This data is from the CME FedWatch Tool as of October 13, 2022.

Thanks for reading. And please let us know what you think.

As always, be sure to download this week’s Bond Report!