How could anyone want to own bonds today?
You'd have to be a fool... right?
Interest rates have fallen near record lows. So bonds pay less than ever. And they'll need rates to fall to even lower lows in order to increase in value.
It seems like a foolish move to recommend bonds. But there's a problem... That's what everyone thinks.
The futures market in particular absolutely hates the idea of owning bonds right now. As I'll show, these traders are as bearish as they've ever been... And that makes this seemingly foolish bet a smart move.
Let me explain...
Right now, futures traders are betting... and betting big.
They expect long-term bond prices to fall. But this trade has gotten so crowded that the opposite is near certain.
You see, sentiment extremes often flash near breaking points in the market. When traders all pile into one side of a trade, it often signals that a change in the trend is right around the corner.
Today, futures traders are extremely bearish on long-term bonds. An easy way to see this negative sentiment is through the Commitment of Traders ("COT") report for bonds.
The COT report is a weekly survey that tells us what futures traders are doing with their money. And when they all bet in the same direction, they're usually wrong.
Today, futures traders are all betting against long-term bond prices. Take a look...
Futures traders expect bond prices to fall further. But looking at previous extremes, that's not likely...
We've seen similar cases in 2009, 2017, and 2018. Each instance led to higher bond prices over the next year.
Let's look at the iShares 20+ Year Treasury Bond Fund (TLT) to see what I mean. It's an easy way to own long-term bonds.
In August 2009, traders wanted nothing to do with bonds. We were in the depths of the financial crisis, and even bonds were a hated asset. Then, long-term bonds rallied 25% over the next year.
We saw a similar example play out in 2017. TLT was down 16% from mid-July 2016 through mid-March 2017. Bonds were in constant freefall for about nine months, and futures traders were betting that trend would continue.
That was the wrong bet. TLT rallied 11% to finish the year – another solid double-digit move in long-term bonds.
The last example was even crazier. In 2018, we saw traders betting heavily against bonds. Then, the opposite of what they expected occurred... TLT took off for a 30% rally over the next year.
In short, if futures traders are all betting against bond prices, that means you want to do the opposite.
It may seem foolish to buy bonds today. But history says it's a smart bet. And TLT gives you a simple way to do it.
According to history, double-digit gains are possible in long-term bonds, starting now.
Good investing,
Chris Igou
Further Reading
"This is the kind of investment that can make or break your portfolio," Chris writes. Right now, investors are displaying "home country bias" by betting heavily on U.S. stocks. But this hated sector is primed for major gains... Read more here: Take Advantage of This Reversal and Send Your Portfolio Soaring.
"It's a virtuous cycle that can lead to massive stock market winners," Steve says. The falling value of the U.S. dollar has a massive impact on the global economy. And with so many new dollars being pumped into the system, one overlooked group of stocks could win big... Get the full story right here.
When you find a strong tailwind for a broad sector, it's likely a great buying opportunity. And bonds aren't the only part of the market with huge upside potential today...
THIS TESTING GIANT HAS JOINED THE FIGHT AGAINST COVID-19
Today, we're looking at a company that's making strides in the COVID-19 testing effort...
Coronavirus cases continue to rise as we head into fall... And with some U.S. students back in schools, the demand for accurate tests is critical. Luckily, today's company is providing new testing technology to help students, businesses, and the economy alike...
Guardant Health (GH) is a data and analytics leader in oncology with an $11 billion market cap. While its big focus is on liquid biopsy testing, on August 24, the company announced that the U.S. Food and Drug Administration granted emergency use authorization for its Guardant-19 test. This test detects coronavirus in upper-respiratory nasal samples, with results generally returned the next day. This rapid – and accurate – testing is exactly what folks want... and Guardant Health is ready to deliver.
As you can see in today's chart, GH shares are at an all-time high, up more than 40% this year – and they still have room to run. Demand for accurate tests should only boost shares of this diagnostics company as we continue to battle COVID-19...
