Pulling Away the Football

Poor Charlie Brown.

 

 

Source: Wikipedia

That’s what I thought when I read that hedge funds have gotten massively short the 30-year US Treasury bond. When traders “short” a security, they expect the price to go down. When they short bonds, they think interest rates will rise. At her September press conference, Janet Yellen signaled that the Fed will continue to raise rates, despite stubbornly low inflation. Higher rates equal lower bond prices. So what’s the problem?

The problem is that the market doesn’t read opinion polls. When everyone is short an issue, it’s hard for more selling pressure to develop. Something fundamental needs to change in order to break the long-term trends. And the long-term trends in interest rates have been moving lower, not higher, for a long, long time – not just in the US, but around the world.

Yield on 30-year US Treasury Bonds, 1987-2017. Source: Bloomberg

Time after time, bond market pundits and players have predicted that the long-term trend in lower interest rates is over. And time after time, they’ve been wrong. Sure, interest rates have less space to move lower now than they did 30 years ago. But that doesn’t mean they won’t. Especially when short-term traders are massively short. Pretty soon, those traders will have to cover their shorts and buy the bonds back.

Eventually, interest rates will stop falling and hold steady. And eventually, Charlie Brown will get to kick that football. But if I had to bet, I’d bet that Lucy will pull it away. Again.

Douglas R. Tengdin, CFA

By | 2017-10-05T10:59:31+00:00 October 4th, 2017|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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