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The Next Bubble to Pop

By Jeff Clark
Tuesday, August 30, 2011

It's hard to believe.
Interest rates have fallen back down to where they were last September. Common sense, logic, and the basic understanding of economic principles argue against it, but it is what it is. Here's a look at the most recent 30-year Treasury yield chart...
We can argue that part of the rush into Treasurys has to do with the stock market's recent collapse. After all, the significant drop in yields coincides exactly with the drop in the stock market.
We can also argue that it has something to do with Ben Bernanke promising to keep short-term rates at about 0% until mid-2013.
Yields dropped because investors piled into Treasurys, pushing prices up. (Yields drop when prices rise, and vice versa.)
That news caused a rush into longer-term Treasurys as investors sought to capture any sort of positive yield they could get.
But come on. Really?
If there is one trade this year that has me pounding my head on the table, it's the short Treasury bond trade. U.S. Treasury bonds were just downgraded from triple-A to double-A-plus.
The budget deal is a mess. And the government keeps spending far more than it takes in. So why on earth are folks willing to loan the U.S. government money for 30 years at the paltry yield of just 3.6%?
Logic is on vacation.
Let's face it... investors are scared. They're willing to lock in a guaranteed loss of purchasing power for 30 years in exchange for a guaranteed return of principal. It's not a bet I would make. In fact, I'd bet against it all day long.
Just as I was bearish on bonds last fall – the last time Treasury yields were this low – I have to be bearish on bonds here. Bond prices are in bubble territory. And just like all bubbles, when it pops, it will be sudden and dramatic.
Of course, it's hard to time the bursting of a bubble. So you must be patient.
But at a 3.6% yield, being short Treasury bonds is a far better trade right now than being short the stock market.
Best regards and good trading,
Jeff Clark

Further Reading:

A week ago, Jeff said that the next seven days will determine the market's fate. "If it happens by the end of the month, the bull will continue to run," Jeff writes. "You'll want to use any weakness in September as a chance to buy stocks." Find out what metric he's using to keep his finger on the stock market's pulse here: The Next Seven Days Will Determine the Market's Fate.
If Jeff being bearish on bonds sounds familiar, it's because he felt this way late last year. "If you need to be bullish on something, be bullish on interest rates," he wrote. Interest rates climbed from 3.9% to 4.8% over the next four months, nearly hitting a four-year high. Get the full story here: If You Must Be Bullish on Something, Try This.

In The Daily Crux
Market Notes
S&P 500 quietly jumps 7% over the past week... now testing "breakdown" level above 1,200.
Fear index "VIX" slowly shifting into downtrend... touches its lowest level in almost two weeks.
Natural gas fund UNG touches fresh all-time low… even though natural gas prices are up 14% since last October.
China Life Insurance breaks down to a four-year low... Shanghai Index still stuck in downtrend.
Market Watch
Symbol Price
S&P 500 1210.08 +2.8% +13.7%
Oil (USO) 33.96 +2.4% +1.2%
Gold (GLD) 173.89 -2.0% +43.7%
Silver (SLV) 39.72 -1.7% +112.4%
U.S. Dollar 74.22 +0.0% -10.3%
Euro 1.45 +0.1% +13.6%
Volatility (^VIX) 32.28 -9.3% +32.0%
Gold Stocks (^HUI) 592.20 -0.8% +21.7%
10-Year Yield 2.27 +3.7% -14.3%

World ETFs
Symbol Price
S. Africa (EZA) 66.98 +3.8% +18.5%
S. Korea (EWY) 55.30 +4.2% +16.1%
USA (SPY) 121.36 +2.9% +15.9%
Canada (EWC) 29.29 +2.1% +13.2%
Taiwan (EWT) 13.54 +2.8% +11.7%
Singapore (EWS) 12.78 +2.2% +8.7%
Israel (ISL) 14.95 +5.5% +4.5%
Japan (EWJ) 9.72 +1.4% +3.7%
Lat.America (ILF) 45.88 +3.0% +3.2%
Russia (TRF) 18.27 +3.1% +1.5%
China (FXI) 37.97 +2.7% -3.0%
India (IFN) 26.23 +3.5% -12.3%

Sector ETFs
Symbol Price
Oil Service (OIH) 131.14 +3.7% +32.6%
Internet (HHH) 73.94 +3.9% +32.0%
Retail (PMR) 19.63 +3.8% +25.0%
Big Tech (QQQQ) 54.61 +2.8% +24.9%
Consumer Svcs (IYC) 67.68 +2.8% +22.4%
Basic Mat (IYM) 69.92 +3.7% +20.3%
Media (PBS) 13.12 +4.4% +17.9%
Health Care (IYH) 68.07 +2.7% +17.2%
Big Pharma (PPH) 67.39 +2.6% +15.6%
Water (PHO) 17.21 +4.7% +15.3%
Industrials (IYJ) 60.09 +3.4% +15.0%
Real Estate (IYR) 56.39 +3.2% +14.8%
Semis (PSI) 13.63 +4.6% +14.5%
Telecom (IYZ) 22.14 +2.7% +13.1%
Utilities (XLU) 33.65 +2.0% +12.7%
Transportation (IYT) 83.25 +3.6% +11.2%
Software (PSJ) 22.76 +3.7% +9.3%
Biotech (PBE) 19.58 +3.4% +9.1%
Defense (PPA) 17.37 +3.2% +8.9%
Construction (PKB) 11.40 +4.3% +6.7%
Insurance (PIC) 14.36 +3.5% +2.6%
Financials (IYF) 49.48 +4.0% +0.9%
Nanotech (PXN) 7.34 +3.5% -8.7%
Alt. Energy (PBW) 7.26 +4.5% -16.3%

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