Today's BONDS!

Trend Fader · Mar 25, 2004

Quote from Cutten:

You are assuming that i) the bond market is driven only by inflation expectations, and ii) the market's expectation is always correct.

Point i) is wrong for the following reasons:

1) the bond market is driven also by huge (several hundred billion per year) central bank purchases by BoJ and China, for currency intervention purposes. These have nothing to do with their expectations for US inflation.
2) the bond market is also influenced by huge dynamic hedging from mortgage financing institutions such as Fannie Mae. Again, these have little if anything to do with inflation expectations.

Point ii) is clearly wrong. A quick look at history shows that markets are at times completely and utterly wrong about the future, pricing in the exact opposite of what actually happens. Look at the US bond market from the late 50s until around 1980 - it was wrong for over 2 decades. Then when Volcker started a clear path to break the back of inflation, the bond market didn't believe it and was wrong for another few years, most notably in 1984, where it was anticipating double digit inflation for the next 30 years - one of the worst financial predictions in human history.

Markets are most likely to be completely and utterly wrong towards the end of multi-year secular market trends - Nikkei 1990, Nasdaq 2000, dollar 1985/95/2001, commodities 1980/2000. The classic sign is when the fundamentals point to a major secular reversal, yet the market ignores this and stages a final blowoff which catches out all the early birds and pulls in the last suckers at the highs.

Note that in the 70s, commodities led bond yields in recognising inflation/stagflation. In the early 80s, commodities turned down years before bonds finally recognised that inflation was dead. Commodities crashed before the 1930s Great Depression really kicked in - whereas bond yields didn't hit lows until 1941. Likewise, in the early 00s, commodities are once again leading bonds by years. Commodities as a group are a relatively "clean" market, driven by pure supply demand and with relatively little government intervention. Bonds are a massively distorted market, driven largely by central bank policy. In the US's case, the bond market is also driven by foreign central banks of Japan, China, and Europe. Thus it should be clear that commodities are a far earlier warning signal on inflation and deflation than the bond market. Anyone relying on the latter over the former is going against 90 years of financial market history.
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Excellent points.

cwjcntr · Mar 25, 2004

Isn't inflation detrimental to bonds per se unless you're trading in TIPS?

I agree with part of your points that you made, and clearly as of late we've seen BoJ buying for currency intervention.

A question that I have is that Japan's FY is over Mar 31. I'm wondering (as I'm sure everyone else is) what are going to be the next steps? BoJ unloading tsys, or will they keep buying more.

have a good nite, the Asian session is pretty interesting tonite

waggie945 · Mar 25, 2004

You've got to be kidding me, right?

You take a 5-word quote of mine that I posted back on March 9th, and remarks that I made in reference to Dr. Zhivodka's posts and 16 days later you decide to right a doctoral dissertation on Central Banks and their Monetary Policies that influence the United States Bond Market?

Man, whatever possessed you to comment about a 5-word quote from over 2 weeks ago?

In fact, I am in total agreement with you observations.
Good work, but most of us are watching March Madness right now!

cwjcntr · Mar 25, 2004

LOL

GO ILLINI!

Quote from waggie945:

You've got to be kidding me, right?

You take a 5-word quote of mine that I posted back on March 9th, and remarks that I made in reference to Dr. Zhivodka's posts and 16 days later you decide to right a doctoral dissertation on Central Banks and their Monetary Policies that influence the United States Bond Market?

Man, whatever possessed you to comment about a 5-word quote from over 2 weeks ago?

In fact, I am in total agreement with you observations.
Good work, but most of us are watching March Madness right now!

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FX-Trader · Mar 26, 2004

Great, eventually someone got fear of inflation and decided to sell all that stuff.

cwjcntr · Mar 26, 2004

Hahhhaha

I liken it to blood in the water... great day! great day for us shorts

This calls for a drink!

Quote from FX-Trader:

Great, eventually someone got fear of inflation and decided to sell all that stuff.

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cwjcntr · Mar 26, 2004

Should be interesting next week ahead of the jobless claims on Friday, but looks like on the thirties, the 114 level could be a bit of a fight.

Hope you bond traders had a good day today, let's get ready for next week!

CoolTrader · Apr 2, 2004

I had short positons from yesterday, but closed them at yesterday's closing price before 8:20 am. Because I don't trust the stop orders provided by J-trader. CBOT doesn't have native stop orders, if the market moves in the opposite direction and your stop orders are not triggerred fast enough, you could be killed. What platforms are best to play fast moves like this?

SethArb · May 4, 2004

sheesh

for a minute or so before the FED announcement

the treasuries rallied sharply , then dove to session lows

then after the FED announcement
they rallied again to new highs , before dropping again

sheesh ... my neck is hurting ....

daddyeaux · May 4, 2004

I think Dr. Alan Greenjeans has been into the mushrooms.

He obviously doesn't buy his own gasoline or health insurance.

1% Fed funds at a time when cost of living is going up 5-10%.

reminds me of Brazil a few years ago.