Bond Bear Antes Up

This article originally ran on July 27, 2005, and is being re-run in anticipation of the Fed meeting on Tuesday.

After one of their most volatile two-week periods in the last eight months, bond prices the last three tradings days have settled down like an overtired baby. The tension that's building over interest rates suggests that this consolidation period can't last forever.

As I mentioned in passing on Monday, I think the bond market looks vulnerable at current levels and the better risk-reward trade is to be positioned for a rise in yields. The yield on the 10-year has tumbled some 30 basis points in the last three weeks on a couple of weaker data points. It has also been goosed by a flight to safety as stock prices suffered steep declines over the last two weeks. But stabilizing stock prices have removed some weaker hands of demand for Treasuries.

Duck, Duck, Chicken

Now we can focus on the economic data points, and more important, what Federal Reserve policymakers will do and say at the next FOMC meeting on May 3. A hotter-than-expected consumer price index vitiated the benign producer price index, and a stronger-than-expected housing market, which we know Greenspan is targeting for a takedown, pretty much offsets the weaker-than-hoped-for consumer confidence number. Wednesday morning's weak durable-goods number has caused some more knee-jerk buying of bonds and provides a very good entry point for establishing a bearish position.

With rates on the 10-year sticking stubbornly near where they were about two years ago, despite seven rate hikes in the last 10 months, it seems many investors are playing a dangerous game of chicken with the Fed. They are bound to lose. All indications are that the Fed will raise rates by another 25 basis points and maintain its measured stance and voice its continued concerns about inflation. With bond yields sitting near the low end of their two-month range, bond prices now seem much more susceptible to reacting bearishly to any strong or inflationary data or hawkish words from the Fed.

I'm currently looking for ways to get bearish or bet that yields on the 10-year will move quickly back above their March high of 4.62% within the next three weeks.