Shorting bonds is hazardous to your health

A massive rally is ongoing in Treasuries today, with 10-year yields down 11 basis points to 2.11%.

Almost everyone got it wrong on the 'short-bonds' trade again. Here are the reasons why:

  1. This isn't a regular hiking cycle. The Fed might only end up hiking 4 times and if so, 2% Treasury yields don't look bad in comparison to Bunds or anything else.
  2. The big trade is the flattener, where you sell 2s and buy 10s. It's down to 145 bps from 178 three weeks ago and it makes a lot of sense
  3. Now, if China wants to devalue they will be buying Treasuries
  4. Today's move to devalue is causing capital outflows from China (into US dollars and Treasuries)
  5. The US economy will get hit later by the strong dollar

With 10-year yields at the lowest since June 1 and threatening the lowest since late April, there could be room to run down to 1.9% in the months ahead.

Ultimately, I don't think that hurts the dollar because it's still comparatively stronger. The next trade, to me, would have to be buying stocks and cheap borrowing rates set off another round of buybacks.

Update: Bill Gross sees devaluation as bullish for Treasuries.