‘Melt up’ in US Treasuries; reversionary risk growing….

This August is a fortuitous period for bond bulls. Massive and historic drops in bond yields produced immense gains for bond holders. (yields and prices move differently)

Take a look at the iShares Long-Maturity bond ETF below (TLT). Prices are leaping into new all-time highs in the most emphatic fashion. In technical terms, this appears to be a ‘trend acceleration’.

The last time price surged at such a frantic pace was in the third quarter of 2011 – when America’s credit rating was downgraded by Standard & Poor’s. This resulted in a massive scramble into haven assets and, among other things, ‘Operation Twist’ and QE 3 in the following months.

So the relevant question now is whether we will see further monetary easing by the Fed? I suspect yes. The 25bps rate reduction could be just the starter. The market is screaming for further monetary easing and the Fed might be dragged into it.

Technically, however, bonds are at such an elevated state that any change in market sentiment may cause violent counter-reaction. Look at what happen in 2009, 2011, and 2015 when bond prices surged: Steep reversions occurred soon after.

Therefore from risk-reward perspectives I would not favour chasing bond prices higher. One is chasing limited returns for large – and growing – risks. Who knows, China might even be tempted to dump some Treasuries at favourable prices.


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