Short Bonds Now!

As the fiscal cliff is nearing with the end of the year 2012 in sight and total public debt skyrocketing to the debt limit of $16.4 trillion, investors need to seriously start worrying about the U.S. bond market.

Technically, the bond yields on the 10 year treasury notes are bottoming out. We could see bond yields rising and bond prices collapsing. Just recently Jim Rogers disclosed that he is short U.S. bonds. Aside from the rising debt and the fiscal cliff we should note first that 30 year fixed mortgage rates have hit a new high of 3.5% and are on average at 3.4%. As bond yields follow the mortgage rates closely I expect bond yields to go up too.

Chart 1: 10 year U.S. bond yield

Further evidence of a coming bear market in U.S. bonds can be found on the open interest front. Historically, when commercials are net short the bonds, bond prices will show weakness going further. This can be seen on Chart 1 versus Chart 2. When the bond yields go down on Chart 1, the net open interest will tend to go to the short side (red curve goes downwards on Chart 2). At the same time, when bond yields go up, the net open interest will go to the long side or upwards. The only time this correlation didn't add up was during the economic crisis of 2008 where bond yields were artificially suppressed. 

To see what more evidence I have, go here.