US five and ten-year notes have made extensions in both their futures prices and yields. Futures prices are subject to periodic dislocations as each delivery month matures, being replaced by the next one along. This is not true of the yield series, which is refreshed so often that it is practically continuous, leading to better signals. Here are the ten-year price and yield charts (one is the reciprocal of the other). This means that we have another chance to sell these instruments here, coming soon after German Bunds also made a top extension.
The problem is that these instruments are not freely traded in a free market – they are subject to the manipulations of central banks who have been buying them as part of the global exercise of ‘QE’. Like a giant open-ended ‘reverse repurchase’ this is their way of pumping money into the economy and thereby stimulating better economic results. It isn’t working very well but they are all doing it as it’s the only weapon they have left. Even the US Federal reserve is still doing it to some extent by re-investing the proceeds of the bonds and notes they already carry in new instruments.
Because of this seemingly endless steadying effect on prices and the consequent entrenched uptrend, these bonds and notes have now assumed the status of ‘flight haven’. This is what nervous investors buy when they are afraid, as they currently are, very. Short-selling government bonds has become a very risky activity, known to some as the ‘widowmaker’ trade and there have been some high-profile casualties in the hedge fund world who have found it career-terminating.
Nonetheless, the fact is that prices are now so pumped-up by these dual streams of buying that yields are negative quite far out along the curve – investors pay the government to look after their money. In Japan for example, even the ten-year government bond produces a negative return BUT Japan has debts that are far and away the largest of any nation in relation to its economy. This is unrepayable and clearly the situation is one of group madness, so it is worth trying to short-sell these bonds occasionally when there is a good strong signal, like now.
Eventually, so many buyers will have have panicked into these markets for all the wrong reasons that there will be a rush for the exits and a big drop. In the meantime, don’t risk much on each attempt unless you want to make another widow, but there is the potential for a big payoff.
