The Great Treasury Explosion is Coming

Take what you want from that headline!

The point I want to make is this:

We could soon witness a sharp and steep, though perhaps short-lived, rally in Treasury prices.

To be sure, I began to think we were due for a rally in Treasury prices back in June. That’s when prices had already taken a big hit and there was a palpable risk-off mood in other asset classes. I thought Treasuries might get a a safe-haven boost in such an environment.

Apparently there were plenty of others who thought the same thing. Because the negative mood came and went with barely a hiccup in Treasury prices’ downtrend. In fact, anyone who positioned for a rally in Treasury prices were devoured by the bears on a renewed surge lower.

And that leaves us where we are today. The downside has become quite extended. And it appears the trade is becoming a bit lopsided as the fundamentals are shaping up in such a way to confirm the suspicions driving Treasury prices lower.

But we know the market. And most of us probably respect the buy-the-rumor-sell-the-news dynamic. In this case, however, it’ll be a sell-the-rumor-buy-the-news dynamic if Treasuries do rally.

As we near an anciticpated announcement of Federal Reserve tapering, Treasury prices appear ripe for a sharp, corrective rally. The catalyst may be less hawkishness — less taper — than expected. At the same time, I looked at the latest CFTC Commitment of Traders (COT) data yesterday morning …

With regards to positioning in 10-Year Treasury note futures, the speculators are running an extreme net short position (bearish) while the commercials are running an extreme net long position (bullish). At extremes, the commercials tend to have it right and the speculators tend to have it wrong. Check out the following chart for a visual on this idea:

Is this explosion to the upside going to happen today? Maybe. Tomorrow? Maybe. This week? Perhaps.

It may make sense to monitor the COT data for confirmation, i.e. wait till positioning begins to reverse before throwing your bets down. (You can get the newest data as early at 3:30 Eastern on Friday afternoon.)

But needless to say, even if we are in a long-term downtrend for Treasuries (uptrend for yields), it appears a corrective rally is due to commence very soon.