The Daily Prophet: Even Bond Traders Are Starting to Hate Bonds

Connecting the dots in markets.

Betting against bonds has probably been the ultimate "pain trade" in markets in recent years despite a chorus of warnings from so-called experts that record low interest rates and yields have nowhere to go except higher. But now there are signs that even fixed-income traders are getting fed up with being paid almost nothing to hold debt assets.

A widely followed JPMorgan Chase client survey for the week ended Oct. 2 found that sentiment toward U.S. Treasuries is more negative now than any time since 2005. If they are right and the bond market takes a tumble, it's likely that borrowing costs for companies and consumers will rise as well. There are plenty of reasons for traders to be worried. This month the Federal Reserve transitions to a more restrictive monetary policy program known as quantitative tightening under which it starts shrinking its $4.47 trillion balance sheet. Also, the Trump administration's tax-cut plan would likely lead to more issuance of Treasuries to make up for any lost revenue. Meanwhile, in the betting markets, former Fed Governor Kevin Warsh, seen by some traders as having a more hawkish tilt, has the highest odds to succeed Fed Chair Janet Yellen, according to Bloomberg News' Brian Chappatta and Edward Bolingbroke.

To be sure, U.S. bonds have a lot going for them, besides the notion that sentiment surveys can often be seen as contrarian indicators. International investors have recently boosted their purchases, lured by yields on Treasuries that are on average 1.43 percentage points higher than they can get anywhere else. As recently as 2011, Treasuries yielded 1.18 percentage points less than the rest of the world. Bloomberg Intelligence rates strategist Ira Jersey noted in a report Tuesday that at 2.33 percent, 10-year Treasury yields are close to fair value of 2.39 percent, based on a simple model using real gross domestic product, the consumer price index, policy rates, and the share of the Treasury market owned by the Fed going back to 1947. 

Major U.S. stock indexes have reached new highs again this week, but one very important part of the market is sending a very disturbing signal. The technology-stock-heavy Nasdaq 100, stuffed with names such as Apple, and Facebook, crossed the 6,000 level for the sixth time in a month on Monday, but again failed to hold on. It has closed above that mark just once, on Sept. 13. Large speculators last week reduced their net long positions in mini futures tracking the gauge to the lowest level since May 2016, Commodity Futures Trading Commission data show. Exchange-traded fund investors pulled almost $900 million from tech-focused funds over the past five days, more than any other sector tracked by Bloomberg. This is important because it suggests that tech stocks may be ceding leadership of the overall market to bank and energy stocks, according to Bloomberg News' Lu Wang. The rotation has been fueled by higher bond yields, a stabilizing dollar and the release of President Donald Trump’s tax plan. The Nasdaq 100 had been having a 2017, powering through 5,000 on Jan. 6 on its way to a 23.1 percent gain this year through August. Since then, it has been flat.

The optimism that built so rapidly in the pound for most of September as Bank of England policy makers talked up the prospects of an interest-rate increase is fading just as quickly. After rising 5.74 percent between Aug. 23 and Sept. 21, the Bloomberg Pound Index has since fallen 1.69 percent. While some of the weakness can be attributed to the rebound in the dollar, it's also true that the economic data in the U.K. hasn't come in as strong as expected. On Tuesday, IHS Markit’s gauge of British building activity fell to 48.1 for September, below the median economist forecast for a reading of 51.1. For the first time since August 2016, the index was below the key 50 level that separates growth from contraction. Also weighing on the pound are signs that the government is increasingly concerned that it could crash out of the European Union if a trade deal can't be struck soon. Leaving the EU without a deal would be catastrophic for business, throwing into legal limbo industries from financial markets to air travel and pharmaceuticals, according to Bloomberg News' Tim Ross. 


Bullion investors may be growing inured to the war of words between the U.S. and North Korea. On Monday, a day after Trump said Secretary of State Rex Tillerson was “wasting his time trying to negotiate” with North Korea over its nuclear arsenal, holders of the SPDR Gold Shares exchange-traded fund pulled the most money in more than two months, according to Bloomberg News' Luzi Ann Javier. Gold has slumped more than 6 percent, to $1,274.60 an ounce, after reaching more than $1,360, its highest in a year, in early September. Also weighing on gold is the notion that the Fedwill boost interest rates by year-end. Hedge funds are exiting gold futures and options at the fastest pace in more than two months. In the week ended Sept. 26, money managers cut their net-long position, or the difference between bets on a price increase and wagers on a decline, by 16 percent, the most since July 11. JPMorgan analysts recommended staying short on December gold futures and “continue to caution against holding gold as a political hedge during the global rate normalization cycle.”


Stocks in China are known for their big moves, but even the most jaded observer had to take note of what happened Tuesday. China’s offshore stocks kicked off the new quarter with their biggest rally since April 2016, as the MSCI China Index jumping as much as 2.4 percent when Hong Kong’s markets reopened following a holiday. A narrower index of Chinese H shares soared 3.9 percent. A mix of policy easing and strong factory data proved a potent combination for investors, according to Bloomberg News' Richard Frost and Emma Dai. If anything, the gains underscore what a blockbuster year it has been for the nation’s stocks, or at least for those traded in Hong Kong and the U.S., after what had been a poor decade for returns. Before this year’s 45 percent increase in the MSCI China Index, the benchmark had dropped 10 percent since the end of 2009. Companies from China, Hong Kong and Taiwan make up the top 15 performers this year on the MSCI Emerging Markets Index, while Chinese shares are the most expensive relative to their developing nation counterparts since 2011.


It's the time of the month again when investors get a flood of data on the health of the U.S. labor market in short order. The deluge kicks off Wednesday with ADP Research Institute's monthly report on hiring trends. The median estimate in a survey of economists by Bloomberg is for a gain of 135,000 for September, down from the 237,000 increase in August. The report is important because the data will most certainly suffer because of Hurricanes Harvey and Irma, according to the economists at Bloomberg Intelligence. To be counted as employed in the ADP tally, an individual needs to be active, but not necessarily paid, as is the case with the payrolls data, they note. However, as many business were closed in the aftermath of the storms, many individuals were likely inactive, thus not employed. The ADP report is followed on Thursday by the Challenger, Gray & Christmas data on job cuts and the Labor Department's monthly payrolls report Friday.  

Why Small-Cap Stocks Are Finally Joining the Rally: Ben Carlson

Trump Tax Plan Is Only Short-Term Bearish for Bonds: David Ader

The September Jobs Report's Deeper Meaning: Mohamed A. El-Erian

Today's Tax Cuts Are Tomorrow's Tax Increases: Tyler Cowen

Australia's Luck Looks to Be Running Out At Last: Satyajit Das

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