Where Are Interest Rates Going Next?

JC Parets
January 17, 2017

There is something fishy happening in the bond market these days. Sentiment is hitting historic bearish extremes as US Interest Rates have fallen over the past month. This to me seems like a "too little too late" sort of thing from those who missed the bond sell-off that began last summer. If you recall, we had been ultra-bearish bonds (bullish rates) since the middle of the summer (see: August 3, 2016). That worked great and all of our targets were hit in the 4th quarter. Since December, we've been approaching the bond market from the long side and sentiment these days is reiterating why we would still rather err on the bullish side moving forward.

Here are a few things I'm noticing:

  • Our sentiment data for 10-year treasury notes is showing all-time historic bearish readings. The last time sentiment was this bearish was the end of 2013 just before an epic 40% rally in $TLT and rates fell from 3% to 1.6% in 10s over the next year
  • Commercial Hedgers (who we consider the "smart money") are the most long in the history of 10-year notes. As far as our data goes (20-years), Commercial Hedgers have never been this long of US Treasury Bonds (10-year notes). As of last week, they were net long 644,559 contracts
  • Our sentiment data for 30-year Treasury Bonds is showing the most bearish readings since May of 2006. Interest rates peaked the following month and those bonds rallied 40%
  • Our sentiment data for 5-year notes is showing the most bearish readings since early December of 2015. The U.S. 5-year yield got cut in half over the next 7 months.
  • Commercial Hedgers (who we consider the "smart money" is the most long 5-year notes in history. Our data goes back 20 years and the smart money has never been this long (not even close). As of last week they were net long 586,421 contracts

I can keep going but I think you guys get the point. Speculators are more bearish of bonds than ever before. The smart money, on the other hand, is the most bullish ever.

Whose side do you want to be on?

I still think we need to be buying any and all dips in US Treasury Bonds either through Futures $ZB_F or through the ETF $TLT or options. One way or another, we want to err on the long side for sure as a correction in rates is likely due and apparently well on its way.

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Cheers,

JC

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