Echoes of 2002/2003 in the Bullish Bond Reversal

I was bearish going into the long bond auction yesterday, and as I wrote in Columnist Conversation, the auction indeed went very poorly. But almost immediately after the auction we saw a huge bull reversal. This is a chart of the old long bond (not the one just auctioned, but the previously auctioned one):

Long Bond Chart Source: Bloomberg

What gives? Clearly there was an abundance of shorts going into the auction, so even though the auction tail was huge, there were no sellers around to keep it lower. You can see the rally peaked at $102, having hit that level earlier in the day. It faded slightly from there, but early this morning is pushing that $102 level again.

This is very much reminding me of late 2002 and early 2003, which was the last time the Fed was extremely easy, the curve was this steep, and everyone was afraid of interest rates rising. Back then, we kept getting these sudden and severe Treasury selloffs followed by grinding rallies that just frustrated the heck out of investors.

My outlook for rates generally is that we'll probably be higher a year from now, but not as much as most people think. People sitting in cash waiting for some kind of huge rates selloff are going to be disappointed.

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At the time of publication, Graff had no positions in the issues mentioned, although positions may change at any time.

Tom Graff is a managing director of Cavanaugh Capital Management, a registered investment adviser in Baltimore Maryland. The opinions expressed here are Graff's own and in no way are the statements of Cavanaugh Capital Management, and may or may not reflect the strategies being pursued for clients of Cavanaugh Capital Management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Graff appreciates your feedback; click here to send him an email.