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Rally 'round the Long Bond



30-year Treasury Bonds have been stabilizing for the past month after their dramatic decline (in price) beginning in June. In the futures that trade based off the long bond, it appears as though the prospects for rising bond prices and declining yields are brighter than they have been in some time.

Commercial traders in bond futures, which are those traders holding at least 1,000 contracts, have been building up long positions during the trading range of the past month, and have increased their net long position for five straight weeks. They are now net longer than they have been in over three years. Small speculators, on the other hand, who tend to be consistently wrong on market direction, have been getting increasingly short.

The chart below shows what I call the "variance", and is simply a combination of the two trader groups. As the variance (the blue line) rises, that means commercial traders are getting longer and/or small specs are getting shorter - that tends to be positive for bond prices when an extreme is reached. As the variance falls, commercials are becoming shorter and/or small specs are getting longer, which is usually negative for bond prices. The green and red horizontal lines show the standard deviation of the variance since the year 2000 (the light lines are 1 standard deviation; the thicker lines are 2 standard deviations).

We can see that currently, the variance is the most positive it has been since the bond low in 2000, and is more than 2 standard deviations above the mean of the past three years. If we go back to 1986, the current variance is more than 1 standard deviation above the mean, so we're relatively extreme here in the context of both recent and long-term history. Obviously, this doesn't mean bonds HAVE to turned around and head higher here, especially if we're in the beginning stages of a long-term rise in interest rates, but it is one factor that would support at least a temporary halt in the rise in rates. Please note that this information is current through this past Tuesday, and does not take Friday's bond rally into account.

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