Bond Yields Can Only Go Higher, Right?

There is a big warning sign out there that is widely ignored, so we thought we will briefly comment on it. Treasury note yields have trended lower since the beginning of the year – against widespread expectations that yields would surely rise (because of the “recovery”).

So what has happened to these expectations since then? This is actually truly astonishing. Below is are two charts showing where speculators stand – the hedger position in 10 year t-note futures and the Rydex bond bull ratio (which shows what percentage of all Rydex assets invested in bond funds is bullishly positioned).

In brief: speculators are fighting the trend in treasuries tooth and nail. This is a sign that the trend is likely to intensify. Why would it do so? One reason we can think of is that there will be a wobble in the current complacency about risk (which is becoming more absurd by the day – some of the data we recently posted with respect to positioning and sentiment have become even more extreme).

The 10-year t-note yield – click to enlarge.

Hedgers are currently net long almost 317,000 contracts in 10 year t-note futures – this is the obverse of the speculative net short position (chart via sentimentrader) - click to enlarge.

Rydex bond bull ratio: only 16% of all Rydex assets in bond funds are currently bullishly positioned – click to enlarge.

Addendum: Suspicious JGB Yield Chart

As a friend of ours recently pointed out to us, the chart of 10 year JGB yields looks exactly like the end of the bear market in gold in the late 1990s. If the self-similarity of these patterns continues to hold, it would imply that the long-awaited decline of Japan's bond market will slowly begin over the coming two years, and then begin to accelerate. Eventually – a few years hence -  it should become a veritable implosion.

10 year JGB yield: the chart is a spitting image of gold in the late 1990s to 2000 – click to enlarge.

Charts by: StockCharts, Sentimentrader, BigCharts