Blame it on the Claims

Buzz lightyear of the Toy Story movies is known for his popular saying - "to infinity and beyond!" Following the very weak Philly Fed this morning, the bond lept 1.5 points in a heartbeat (or less than an heartbeat it seems) smashing traders over the head with a bullhorn and going "beyond" most traders tolerance levels. I had a friend say to me that he would be looking for the first sell off to get out of his positions because he has been "wrong." But in all seriousness, have you seen many bulls arguing that the bond trade would be the trade of 2010...to the downside in yields? Further, as I tweeted yesterday, it seemed like everyone was shorting the bond - and today, they all got run over!

In my opinion this rally in the US treasury market is simple. The momentum was already up in price for the UST complex and the Fed came in a few weeks ago, argued that the economy was soft and they would be putting the interest and maturities from their balance sheet to work - in the long end of the UST market! This pushed the trend even further and essentially putting another Pimco into the bond market (how about those 5000k contracts at a time, eh?). Every hedgie on the planet who plays momentum jumped on the trade and away we go! As the day wound down and I prepared to short the 10yr note futures, with a modest stop I might add, some guy on bloomberg says that the rally in bonds makes sense when you consider the claims data. Huh? Adding further gasoline to the fire was Tony Crezenzi, who I have a ton of respect for, saying that at 2% growth, rates are not unreasonable or something like that. I made the move and shorted 10s - modest position again.

Perhaps this was not a wise move but let's consider the facts again. Corporate earnings are not falling off a cliff and a fair value at the moment for the market higher than current values. At the moment, the 10yr is 400% overvalued relative to my earnings measure which is basically a 60 year record! If you take into account corporate earnings, sprinkle in some now rising agriculture prices and already high crude and the softs, you have asset inflation that is just dying to pass through to final goods. Those goods in demand....forgetaboutit! Already moving up. Inflation is in those goods demanded and in my opinion, that is all that matters.

So the facts argue that the treasury market is severely overvalued and displaying tremendous momentum to the upside in price. Further the hounds are out buying corporates at 1% for three years (IBM) and muni's like they are going out of fashion. Meanwhile, JNJ's dividend yield is higher than some levels of its debt. Folks. This is a bubble on so many levels. Perhaps retail does not realize one can lose money when rates back up?

With that all said, one has to obey Mr Market and be careful. The S&P 500 traded very expensive to its fair value from mid 1999 onward and the nazz went screaming higher before getting killed a year later. Thus I will be patient but to me this trade will materialize sooner than later and for all of you bond bulls out there, momentum is a 2 way street.