The Trade Of The Decade

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Get ready for what traders are regarding as the “Trade of the Last Ten Years”

In case you?re wondering, it isn’t another gold bubble. Nor is it catching a ?bottom? on the Athens Stock Market (God help them). And it certainly isn’t the reincarnation of Facebook back from the dead.

But before we reveal what it is, let’s delve into a little history. Every decade seems to be marked by a specific boom and bust phase: In the late 1990s we saw the dot-com Tech stocks bubble which burst in the year 2000. Then, when stocks went out of favour, the housing bubble emerged, and ultimately crashed in 2007. This started the Gold rush at the start of 2009, which ?fizzled out? in 2011.

The global meltdown in 2008, coupled with the uncertainties of a deteriorating Europe, also started another less well-known bubble… I am referring to the parabolic demand for US Treasury bonds (see chart 1).

One of the reasons for this parabolic rise in bond prices is due to the fact that whenever bond prices rise, pension funds are obliged by law to buy more to balance their books. This creates almost a self-fulfilling nature which guarantees the bond market to rise even higher.

But there are signs now that bonds could be about to implode. In fact, the trade of the decade is shorting the US Treasury bond market (or buying TBT). US Treasury bonds pay a fixed rate of interest every six months until they mature. They are issued in a term of 30 years. US bonds are also seen as one of the most liquid safe havens in the world. This is particularly important to understand in the context of how people think about ‘safety?. For example, a commonly held assumption is that when markets get jittery, such as in a time of economic crisis, money goes into gold and silver. This is simply not true.

Although gold and silver are safe havens as a hedge against a devaluing US Dollar, they are not ?liquid?. When hedge funds are looking for safety, they are looking for liquid safety and precious metals are not liquid. Gold and Silver may be liquid for us, but a billion dollar hedge fund cannot just move money into precious metals without incurring losses. Therefore they move money in to the greatest liquidity ? US Treasury bonds.

So is this bond bubble about to finally burst?

Take a look at this weekly chart of the US Treasury bond futures. Underneath the price is an indicator called MACD (moving average convergence divergence). MACD is a momentum indicator which measures the force of the trend. When bond prices make new highs, you want to see the MACD to also make new highs to confirm the strength of the trend. This is demonstrated in the period between July to October 2011 (see chart 2).

However, you will notice that when bonds made new highs this year in 2016, the MACD failed to make new highs. This is known by chartists as negative divergence. It indicates weakness in a market and the potential for a ?bearish? reversal in price. There is also a topping pattern known as a ?double top? which also indicates a reversal in price.

Now let’s zoom in and take a look at a daily chart of the US bonds (see chart 3).

Notice that in July 2016, bonds made a false breakout, one of the strongest signals in technical analysis.

A false breakout is when prices breach previous levels but immediately retreat and close below those levels. As you can see, in July bonds took out the June highs and then immediately ?changed their mind? and closed below those highs.

This false breakout, coupled with divergence on the MACD, and the heavy sell-off on Friday 27th July (as shown by big negative candle) could be an ominous signal for the US bonds. It is the first indication that money is ready to come out of safety and that hedge funds are putting risk back on (i.e. moving money back into stocks).

But if this is the start of the bond bubble implosion then how does one profit from it? The most obvious tactic would be to short the bond futures or the ETF known as TLT ? the iShares 20+ Year Treasury Bond Fund. However, those who do not like shorting can buy TBT ? the ultrashort ETF for 20+ Year Treasuries. This is the inverse of the bond market ? as bonds fall in value, TBT will rise in value.

Some will say that it may be too early to call an end to the bond bubble because of the relative safety it gives investors in light of the Euro-zone turmoil. My answer is that we have to trade what we see ? and what we see right now does not bode well for bonds. Let the slide begin?

 

Alessio Rastani is a 10 year financial markets trading veteran, and at the age of 34 has become a widely followed and respected trading mentor. In 2011 he gained fame and caused controversy when he stated on live TV news that he ?dreams of another recession? and that Goldman Sachs, not governments, run the world. 

The YouTube clip has since been watched over 2 million times, and Alessio has since been interviewed by figures such as Sir David Frost. Alessio hosts free online training sessions where he gives the most up-to-date information on trading to professionals and newbies at www.leadingtrader.com