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Big investors dive for T-bonds as equities close lower again

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Several large investors seem to have placed huge amounts in US treasuries over the past week, probably as a contrarian bet on a big downturn in equity markets, and US equities closed the week with a sell-off.

Data from last week’s treasury bond market shows that 17 per cent of the $22 billion of 1-year notes went to direct bidders, a far higher percentage than usual – and this followed the snapping up of a quarter of three-year notes by direct bidders on Wednesday.

Wall Street consensus

This is contrary to consensus opinion on Wall Street. This expects an economic recovery in 2010 and for bond yields to therefore rise and prices to fall.

Contrarians think the opposite. They think the US is heading for a double-dip recession and that equities will take a big tumble again because markets have become overconfident about the business outlook for 2010.

Indeed with treasury bonds already paying very low yields then you do have to be very pessimistic about the outlook to believe that they are going higher in price because interest rates will fall further.

Yet bigger investors have few other plays available to short the market on any scale. Implementing giant short positions is often very difficult for the largest of institutions.

They leave that to the hedge funds and also to individuals who can buy the short ETF products to take advantage of market weakness as well as market strength. If a really big sell-off is coming in global equity markets then short ETFs will be the trade of the year.

Short ETFs

But not all short ETFs are going to deliver the same gain in another market crash. As a general rule what has gone up most will come down most in a market reversal.

That would point to emerging markets like China and India, even the Nasdaq as well as banking stocks, and short ETFs cover all these positions (see this article).

Of course, if the contrarians are wrong then they will lose money. Treasury prices will fall if interest rates rise as the consensus predicts. However, short positions offer the prospect of excellent returns in a market crash versus the downside loss, and anybody who does not trust Wall Street analysts ought to at least take a small short position as an insurance policy.

US stock indices also closed down for the second week of the year, and they say as goes January so goes the rest of the year. The bear market rally may already be over.

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Written by Peter Cooper

January 16, 2010 at 10:30 am

One Response

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  1. I was looking at the volume for calls on VIX and other short ETF’s but for some odd reason the volume was very low which seemed quite odd but not so odd if you take in to fact that all the shorts were already squeezed out of their cash and positions.

    VIX calls for February and March at $22.5 and $25 were extremely low on Friday even with some of the gains that the VIX made on Friday. The manipulation that is taking place is still very visible.

    Market apparently only dropped due to Dollar strength but I imagine that had the dollar not shown strength then we would have been up another 200 points on the DOW. If the dollar gives up its gains on Tuesday (as Monday is a holiday if I’m not mistaken) and earning numbers from the financials come in strong (which I expect due to low interest rates from the government) then we could see a 150-200 point gain on the DOW this coming Tuesday.

    Andy

    January 16, 2010 at 3:41 pm


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