G7 government bond prices

Discussion in 'Trading' started by Cutten, Oct 10, 2008.

  1. Cutten


    Given the total carnage in stocks, it is interesting to see that govt bonds are trading pretty "heavy". 2 weeks ago if someone said the S&P was going to hit 900, most people's guess for the long bond would be 125-130. Instead it's trading at 117, quite a bit below its high in September. Same with other G7 countries.

    IMO the bond markets are starting to anticipate huge increases in government debt levels, and inflationary pressures from a big boost in the money supply & govt spending, which will all be necessary to stave off systemic meldown.

    This gives a nice two-sided long premium play - long ES puts, long ZB puts. If stocks rally, bonds should fall since the flight to quality bid evaporates. If stocks fall, it increases the chance of inflationary policies. Bonds look in trouble either way.

    A true crash like 1987 may well give a one-day spike to bonds, that's why I advocate puts not shorts. If that spike comes, I would short the crap out of it.

    I reckon both short and long-dated puts are good here. Go deep out-the-money for maximum leverage.

    The 30 year is yielding 4% so there is HUGE scope for a total collapse based on fundamental value (or lack thereof). The yield could easily be 10% in 3-4 years time. It could fall 20% in 3 months and still be overvalued.

    Any thoughts?
  2. btud


    Agree. The bond market is hugely overvalued now, due to irrational fear. It will correct. All world governments put their printing presses on max speed. As soon as deflation panic is over, inflation panic will be next.
  3. tens


    youre right. the bond markets are trading really heavy right now. So market action is bearish, in addition to that, youve had a bearish fundamental backdrop for the last 5 years, AND long term interest rate charts support the idea of a significant bottom here.

    IMO, we are VERY close to THE bottom, and the end of the 20 year bull market in bonds. Everything is lining up.
    Fundamentally, what I think will happen is that China is going to look at this crisis and say "screw these guys, they are in worse shape than us" and as we recover gradually start to diversify out of our debt. They may even be selling into the strength right now.

    So: Not only is right now a good time to be selling fundamentally, technically, and confirmed by market action but also I believe that IF the market action confirms going forward this COULD be the start of a strong multi-year bear market in bonds.

  4. Based on these thoughts, would it also follow to invest out of the US Dollar?
  5. Daal


    I think it will take a while for people to get out of panic mode. we should see deflation and higher bonds for the next year or two then inflation. if the government fails then the bernanke will try his 'unconvetional measures' and americans will get a tax cut financed by the fed(that is an actual fed plan they outlined)
  6. I thought the last couple of days the bonds were signaling an end to the tock carnage, but no such luck.

    Barrry ritholtz has a chart on the adjusted monetary base which looks like argentina, could be anticipating that.
  7. FGBL07


    I feel baffled by the moves in bonds: I had expected them to rise more then they did and the last few days they are dropping. Not the "Flight to quality" I had anticipated to see.

    So the market sees no "quality" in bonds; and indeed what will be the effect of all the money printed now and the Government debt generated?

    There is a convenient - for Governments - way out of this debt and it is called inflation.

    Back to the Seventies?

    I have yet to check the IV of those deep-out-of the money puts but won't it be too high just now?