Bond Breakout

Published on
August 30th, 2018
14 minutes

Bond Breakout

Trade Ideas ·
Featuring Michael Purves

Published on: August 30th, 2018 • Duration: 14 minutes

Michael Purves, chief global strategist at Weeden & Co., discusses why he’s bullish on long-dated Treasuries, despite Fed policy normalization. He explains how he is using options to bet on falling yields in this interview with Justine Underhill. Filmed on August 27, 2018.


  • SV
    Steven V.
    30 August 2018 @ 16:50
    Treasury yields will see new all-time lows during the next recession and are unlikely to ever return to normal. Forty years ago the Fed began to damage and fracture the mechanism which creates inflation, and it will likely break during the next recession. The problem for the Fed is they have no idea how inflation is actually created even though they are responsible for regulating it. Maybe helicopter money will generate inflation, but it if does, it won't for long. The inflation mechanism is severely damaged...
    • PD
      Peter D.
      30 August 2018 @ 23:43
      I am sympathetic to your argument. But what if: 1. The Fed starts buying up the entire stock market, say 5% at a time? ETFs then individual shares? Wouldn't that eventually cause inflation? 2. The Trump Administration did more tax cuts, which brought the deficit to $2 trillion and then $3 trillion a year? 3. The Administration put a blanket 25% tariff on ALL Chinese imports? Methinks that there are no lengths that desperate politicians won't go to to increase their power and to avoid deflation.
    • SV
      Steven V.
      31 August 2018 @ 17:21
      1. Buying stocks is not inflationary. Japan has been doing this with no success. Buying stocks is a response to the failure of the inflation-generating mechanism. 2. Deficit financed tax cuts are not inflationary. 3. If you use the term "inflation" to cover *any* rise in price, then you can get inflation. If you use the original definition of inflation as a rise in prices due to an expansion of the money supply, then no. The power that be want to avoid deflation, but they don't realize they broke the inflation-generating mechanism in our economy. Hence why we will see near 0% 10-year Treasury yields and some form of helicopter money, which will only temporarily be inflationary.
    • CA
      Craig A.
      2 September 2018 @ 08:09
      @ Peter. If the fed do buy equities it wont cause inflation. Will cause stagflation and a zombie state. Just look at Japan for evidence. USA has a completely different mindset than Europe/Japan so the fed will never do this. Inflation need to come from people within the economy spending more, or from a collapse in confidence in the government which causes hyperinflation. Neither is happening now or within the next few years
  • NG
    Nick G.
    30 August 2018 @ 11:03
    This so called "extreme positioning" is all in the eyes of the beholder and is being used to justify a particular narrative. Any bond pro knows it is utter rubbish and that you cannot deduce anything at all from it, apart that large leveraged funds have reduced their massive net long exposure in cash (probably from leveraged risk parity positions) by offsetting it in futures and/or that they are running massive hedged carry positions in USTs. Predictive capacity: zero. Does not mean the trade will not work. But if it works, it will have nothing to do with current positioning in the futures market, which is a small part of the overall bond market. As always, the bond market will react to the perceived future paths of economic growth and inflation. The rest is candyfloss. It is like saying the tail will wag the dog. Only thing you can be sure of is that when they do come to take the trade off, the basis cash/futures will go out a few points as they will need to find someone willing to sell them a lot of contracts. But that could happen tomorrow or anytime in next few years.
    • WM
      Will M.
      30 August 2018 @ 14:21
      Nick don't dispute your experience and judgement, but that positioning data does seem to be extreme given the last 25 years data. Do you not believe these extreme positions are very often indicative over overbought / oversold positions? Raoul and Julian put a lot of stock in these factors, presumably you also disagree with them on this topic?
    • NG
      Nick G.
      30 August 2018 @ 15:27
      Will, as I have commented before, the COT data is split out since 2009. Always remember that COT data relates to FUTURES POSITIONS ONLY. In futures, by definition, for every short position there is a long position. The only short position is in large leveraged funds. The other components are at record longs, as they must be, since for every short position there is an equal long position. Now 3 points: If I was running a huge risk parity book, when would I hedge a part of it? When I no longer thought that bond yields will continue to fall. But does that make me short bonds? No. It makes me flatter and overweight the equity part. If you look at a chart of SPX/TLT all will be clear to you. I might need to lift some hedges at some stage, but I am not necessarily short. And if I wanted to do a large carry trade using Euros given to me cheap by the ECB, when would I do it? Right now, when the spread between the yields is at its widest in decades. That is why the leveraged funds are short futures. Finally, has overall debt increased since 2009 or decreased? It has increased massively. So, someone owns it and someone needs to hedge it. It is perfectly normal that as bond issuance and holdings increase, so will the hedges against it. Do we know for certain which combination of these 3 is at play? No. Probably a bit of all 3 but mostly the third, in my opinion. Now, it is perfectly OK to say that people will lift hedges as inflation or growth moderate and they realize they need more long term bond exposure. What is nonsense is to say that the market will move in any direction because one segment of the market is hedged. Against cash positions we cannot know what they are.
    • DR
      David R.
      30 August 2018 @ 17:18
      Good. A definite candidate for an RV interview. Problem is, the ppl who best know their stuff are too busy, so at most they occasionally do tweets or posts.
    • CT
      Christopher T.
      30 August 2018 @ 20:41
      Agreed with Nick. From a trade signal perspective, COT positioning is a very easy to digest, but superficial form of analysis especially when it comes to bonds. Its an easy narrative and "story" to assign to a trade. The fact that Raoul and Julian put so much stock into this narrative is a function of them needing to appeal to masses
    • RM
      Robert M.
      31 August 2018 @ 06:27
      I don't understand what you are saying. Leveraged bond positions in risk parity portfolios were not invented a few mths ago. And the fact they are worried about their long bond positions makes them less bullish which is the same damn thing as more bearish. And even Vs open interest the leveraged shorts are at extremes.
    • NG
      Nick G.
      31 August 2018 @ 09:38
      Well, Robert, in that case let me make it even more crystal clear. The whole concept of looking at COT is predicated upon being able to "squeeze" one side out of its position. No point in even looking at it else, would you agree? And certainly that seems to be the argument made in the video. Now, if I, as a fund manager, have decided (for whatever reason) to change my leveraged allocation inside a risk parity portfolio by underweighing bond duration from my previous allocation (whatever that might have been), I am NOT squeezable. The market can go to 130'00 or 110'00, it makes no difference to the position I want to have. The only thing that changes is my relative performance. Always bear in mind that if I have underweighted bonds and they go up in price, but the other side, equities, goes up MORE, I am actually right and making more money. That is why I said look at a chart of SPX/TLT. Same if I have a carry position. And same if I have a large cash position to hedge. In all 3 cases, the potential for squeezing these people out of positions, making them cover because they have reached some mythical "stop loss" level, without a fundamental driver, is non-existent. Now, the situation might be reversed if you look at the asset manager category within the COT. They have a benchmark to hit. If they were underweight, they are squeezable, because they will underperform the benchmark, which they have to hit. But they are at record longs. So, the better argument looking at COT could be that the squeezable side are the people who are long. But I not making that argument, because I don't know their cash weightings. I am just explaining that bond COT is nowhere near as simple as looking at Orange Juice COT. Far too many moving parts to make a persuasive argument that record short positions in one category is a clear sign of anything. And again, this does not make the trade suggestion any the less valid. What is not valid is saying that it will work simply because of the current COT.
  • JS
    Jason S.
    30 August 2018 @ 10:32
    Nice...risky move going low now though heading into Fed meeting on 25-26 Sept. Might see yields lower into that date and then bounce on the rate hike. Maybe consider waiting to place trade or moving back timeline by a month or two. Oct 18' seems too early...would be Sept expiry.
  • rs
    rohan s.
    30 August 2018 @ 10:09
    Excellent interview, well laid out trade idea with great fundamental knowledge