A lot of traders are positioned on the long side in treasuries, betting on FED to reduce rates soon (extreme volumes of call options in the market) - to me a total illusion ! ! ! 1. We do not have to hope in trading, because it ends up in losses, rather listening to the FED-speak carefully. They still give hawkish remarks and the financial enviroment from the FED's perspective does not favour lower rates at all. 2. Looking on below chart one can see that VIX and 20yr treasuries are moving in inverted direction in their trends. Treasuries gave, like VIX, a clear trend reversal thus confirming each other trends. 3. The inverted interest spread (short interest rate versus long interest rate) had a trend reversal as well toward the zero line. At the time of crossing the zero line, people will talk about recession in the US while now, nobody factors in that possibility any more.
Long story short: Stock market is in trouble, treasuries - especially long term treasuries - will lose value much more than anticipated, volatility will increase in bonds as well as in the S&P500.
U saying long duration bonds will lose value? Yea in the short term but it's only so long we can sustain 5.5% the interest will kill the debt so over the next year plus election campaign rates will drop to zero almost guaranteed t bills will behave as they are suppose to USA will not default they can't afford to
Woerle
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@DiscoBlue, true - but I'm trying to get a clue on the swings of markets. At the moment, I expect a down-swing in the stock market (=VIX up !) and a down-swing for treasuries as well as long interest rates are going up. Of course, interest rates will reach its apex one day, but not now.....
Franknewman
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@Woerle I watch the fund flows for TMF, many people including myself are positioning speculatively into treasuries as we near the rate peak prior to the peak; I believe this is being priced in so there might not be another leg down after last week
Woerle
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@Franknewman, you might be in the right thinking from a causal perspective. If you go back in history you will also find situations where the market (interest rates) moved significantly without the FED changing the basic rate. This can be caused by sudden changes currency values, rate changes in other major currency areas (EUR, Yen especially - carry trades), finance demand (government), liquidity provision for banks by the FED or sale of treasuries of a certain timeframe or from foreign bond holders. My remarks from my own experiance is therefore to watch out for all major influencing factors and not to focus solely on one causality alone....