Look For Rates to Rebound in 2015

Rick_PendergraftThe 30-year US Treasury Bond has been on a great bullish run over the course of the last year. The price of bonds has gone from $127.50 to a high of $146.02 while the yields have fallen from a high of 3.96% to a low of 2.89%.

While bond holders have been the beneficiaries, for those investors looking for interest income, they can’t be happy with how the rates have fallen. Regardless of which side of the aisle you may be sitting on, there are a couple of items of note with regard to the chart for the 30-year Treasury Bond.

First, the $146 area could act as resistance at this point. This area halted the big bond rally of 2011 both in September and December before prices fell in early 2012. Later in 2012, the price would break through the resistance and move all the way up to the $153 range. After the peak in mid-2012, the price fell for a year and a half and bottomed last December in the $127.50 range.

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Looking at the 10-week RSI for bonds, we see that the most recent rally has sent the price into overbought territory for the first time since 2012. In fact, the reading for the last week of November was the highest reading for the RSI since May 2012.

With the potential resistance at $146 and the overbought status, it would be difficult to recommend buying bonds right now. Then you also have to consider the impact of the Fed ending their purchases of mortgage-backed securities as part of QE3. Another concern would be the recent move by China’s central bank to lower interest rates in their country. While the lowering of rates in China makes US debt more attractive, China has been a big buyer of US debt and if the Chinese economy is weakening to the point of a potential recession, they may not have the ability to buy as much US debt as they have in the past. Bonds are no different than any other good or service, when the demand falls the price has to fall to motivate buyers.

One more concern came from last week’s Commitment of Traders report which showed a pretty significant increase in the bullish sentiment by the large speculator group and in turn a big increase in bearish bets by the commercial hedger group.

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We see that the large speculators have built their biggest long position since May, which happened to occur just before a slight dip in the price of bonds. Conversely, the commercial hedgers have built their biggest short position since May.

Looking back to one year ago before the massive rally started, large speculators were net short approximately 70,000 contracts while commercial hedgers were net long approximately the same number of contracts. Going back to the 2011 rally, when the rally first started, commercial hedgers were again net long approximately 70,000 contracts while large speculators were net short about half that amount.

At the end of the 2011-2012 rally, large speculators were net long over 50,000 contracts while commercial hedgers were net short over 80,000 contracts. While we aren’t seeing such significant levels by the large speculators or commercial hedgers just yet, we also aren’t that far away from those levels considering that large speculators added 21,849 contracts to their long position last week while the commercial hedgers added 28,341 contracts to their short position. One more week like that and the 50,000 contract mark will be reached by the large speculators and the 75,000 contract mark will be hit by the commercial hedger short position.

It isn’t always beneficial to be a contrarian investor, but when it comes to bonds it seems that when the large speculators are overly bullish and the commercial hedgers are overly bearish is the perfect time to be bearish on bonds.

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