I have started to become bullish on Treasury bonds since a few weeks ago and suggested the long-term Treasury could go up after a severe plunge (via TLT). As often the case, I'm guilty of being too early with my calls and TLT continued to declined for a while but it did turn around from its recent bottom around $117. Since then, TLT has mounted a nice rally, especially in the past few weeks and is trading hands around $123 today. Inversely, the long-term interest rate has also come down along the way. I got a question how I feel about the long term bonds and interest rates.
Well, it depends as always on what the timeframe we are talking about. As a long term view, I'm still very bearish about Treasury overall and I believe the 40 years old of the super bond bull market has already come to its end. If this is indeed the case, Treasury should have started a bear market that may likely last for decades to come. That's the nature of bond market that when they enter into a secular trend, it usually lasts for very long time. Can you imagine all the bond active traders aged 60 or below will only know a bull market? I bet it is a bit challenge for them to switch their mindset now that bonds may have started a mega bearish trend. Just a couple of days ago, the Bond King, Bill Gross, has publicly stated if the 10-year interest rate breaks out 2.6%, then officially the bond bull is dead. I think it is just a matter of time that this will occur for sure.
Having said that, nothing comes with a straight line, especially when we are talking about a super turning point for bonds. That's why I became very bullish on bonds lately after seeing so much selloff within a very short period of time. Now we got some nice rally as expected. Has this rally done that we should see lower Treasury and higher interest rates? I don't believe so. I think there is still some room for Treasury to go up and interests to go down. Why so? For one major contrarian factor. As I have talked about COT a few times before, this weekly government report discloses the future traders' betting or sentiment on almost everything. Typically, the smart money (the commercial traders who really know the stuff they are trading) is often right at the time point that they are mostly long at the bottom or short at the top. Conversely, the dumb money (those speculative traders) often do the opposite, long at the top and short at the bottom. Right now, the dumb money as of last week is still extremely bearish on Treasury bonds with the open short positions at a historically high level. This is usually not a good sign for those who are bearish on Treasury in the short term. It often means that the current rally of Treasury may likely continue for a while. When the rally will stop? I don't know but I'd think this rally will last for at least some weeks, until we start to see dumb money becomes bullish again on Treasury.
One caveat thought about TLT. It is challenging its major resistance at the moment, the 50 DMA. More often than not, it may not be able to break out such a strong resistance at one attempt. Technically we could see TLT decline a bit in the next few sessions to rest a bit before mounting another attempt to break out. I won't be surprised TLT comes down to test its support around $120 in the very near term.
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