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Bond Market Rally Is Just Getting Started

Bond Market Rally Is Just Getting Started

Regardless of the puny sell-off taking place over the last few days the S&P500 (^GSPC) has gained 2.5% over the last month. At the same time the yield on the U.S. 10-year treasury (^TNX) moved from 2.8% to 2.65%. By the immutable laws of supply and demand that means investors in aggregate have been simultaneously lusting after equities and bonds.

Pretending for a moment that the Federal Reserve isn't the incremental buyer of debt forcing yields artificially lower, investors should either have a preference for safety (driving yields lower) or risk (moving stocks higher). With bond traders caught flat-footed by the FOMC's decision not to taper last week, the question for investors is whether or not the move in bond yields is sustainable or just a blip.

Count EagleBay Capital CEO J.C. Parets as one of the few traders who thinks yields are headed lower to stay. What Parets loves most about being a bond bull is that so many Wall Street traders are betting in the other direction. In the attached clip, Parets says bonds haven't been this loathed since 2011. Then, as now, the U.S. was facing a debt ceiling debate. When Standard & Poors had the audacity to downgrade America's credit it was supposed to increase borrowing costs. That's the whole point of credit ratings.

Related: America's Downgrade: Two Years Later

Instead bonds rallied 40% sending yields below 1.5%. Parets is looking for more of the same from bonds and a lot of pain for stocks. Noting that equities have taken back most of the post-FOMC pop, Parets says the top is in for now.

"The markets (stocks) are fading," he laughs, "I'm just going along for the party."

His technical targets for the 10-year yield are 2.6% for now followed by a rocking drop to 2.3%. If yields pop back over 2.7% he plans to take the party elsewhere.