Betting Against Bonds (w/ Tom Thornton)

TL;DR

The bond market has experienced a significant rally, but there are indicators suggesting a potential reversal in yields.

Transcript

Welcome to real visions trade ideas today We're sitting down with Tom Thornton of hedge fund telemetry great to have you back. Nice to see you. Thanks for having me So today let's talk about bonds. We've seen quite the rally in the bond market specifically the 10-year Treasury What do you see going on there? And and can this rally continue or is it... Read More

Key Insights

• ✋ Bullish sentiment in the bond market has been high, but trend exhaustion indicators suggest a potential reversal in yields.
• 🎚️ The confluence of indicators, including ETFs and yield levels, adds more conviction to the trade.
• ❓ There is a mean reversion potential between the 10-year yield and the S&P 500.
• ❓ The possibility of equities outperforming, especially if earnings are better than expected.
• 🤪 Shorting bonds while potentially going long on equities could be a suitable pair trade.

Questions & Answers

Q: What indicators suggest a potential reversal in bond yields?

Trend exhaustion indicators, such as ETFs like IEF and TLT, as well as the 10-year Treasury yield, are showing signs of exhaustion and potential reversal. The weekly indicators are also holding around the same levels as in 2017 before a significant uptrend.

Q: How can one trade against the bond market rally?

One can consider shorting Treasuries with futures or shorting the TLT and IEF ETFs. Longer-term durations may provide better trade opportunities, and buying put spreads on these ETFs could be another strategy.

Q: Are there specific levels to watch for in the TLT ETF?

The TLT ETF could potentially find support around 125, considering its current level at around 132. While this may not mark the end of the bull market for bonds, it presents a reasonable bet for a potential downside move.

Q: What are the risks to this trade?

The biggest risk is if the Fed unexpectedly cuts 50 basis points in July, along with poor earnings and economic reports. However, positive factors such as a thaw in China tariffs, a more cautious Fed stance, and better-than-expected earnings could impact the trade.

Summary & Key Takeaways

• The bond market has seen a rally, with the 10-year Treasury yield dropping. Bullish sentiment has been high, but trend exhaustion indicators are suggesting a potential trend change.

• While it's uncertain if the bond rally is over, there is a possibility of a retracement of about half of the current drop in yields.

• Various indicators, such as ETFs and yield levels, are showing signs of exhaustion and potential reversal in bond yields.