As Bond Rates Collapse, Will Growth Slow?

Hey There Income Hunters,


There was a move in long-term interest rates yesterday, which kicked off in the UK as they announced a sharp decrease in bond supply.


I haven’t seen a move like that in a long time, and you know what I always say: Bonds are a predictor of the economy …


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So, when US bond rates followed the UK down in yield, I wondered if it could signal slower growth ahead. 


The Atlanta Fed May Know Something


Notice the Atlanta Fed’s real-time report below on their forecast for the Gross Domestic Product (GDP) for Q3. As you can see in the graph below, the Fed has a much lower forecast than Wall Street economists …


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This may cause a swing in psychology and shift Q4 to trade for stagflation ahead as opposed to accelerating growth and inflation.


Today, I’ll give you the critical signposts and where we may see some cracks in the economy …


Repo Market Rates Rising 


I always talk about the treasury and mortgage bond repurchase market playing a critical role in providing funding for hedge funds and trading desks. 


This market is where firms can go to get funding in return for depositing their US Treasury and mortgage bonds as collateral against the loan. 


When rates rise in this market, it could be a symbol that cash is drying up … 


This could send shock waves through the market, forcing investors to sell their financial assets for cash …


Notice the chart below showing for the first time this year that rates are moving higher … 

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I will be watching this closely. If we see a few more days of this and rates rise further, it may be an opportunity to short the stock indexes or corporate bonds in anticipation of further credit issues …


Watch for confirmation in the form of a iShares Treasury 20+ Maturity Bond ETF (Ticker: TLT) breakout.


TLT broke above the 50-day moving average on higher-than-average volume yesterday, so if we get follow through, this would signal the bond market sees a slowdown coming in the economy.


I am not bullish on bonds and would use this rally to set up a put spread strategy next week heading into the second week in November when the Treasury issues a large bond supply and we get October’s CPI report …


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Watch for the S&P 500 Index to Breakdown


Selling the S&P 500 Fund (Ticker: SPY) would be a great play if bonts continue their rally.


I purchased two $SPY 455/454 put spreads that expire this Friday, Oct. 29 and paid $.30. I will add if we follow through to the downside …


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Bring It Home


Yesterday was another example of why you should not pay attention to the consensus narrative.


Just focus on the market internals to determine what is beginning to change. 


The move in TLT was a huge wake-up call that bonds were attracting buyers. Bonds are THE safe haven for investors, so flows in and out of bonds are meaningful because they usually indicate the opposite flows in and out of stocks.


Friday is the month’s end, so if investors are offside they are most likely long stocks. If price action continues to indicate selling, we could see a bit of a correction into Friday’s close.


I’ll let you know of other signals I detect. Until then …


Live and Trade With passion My Friends,

Griff

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