Commodity Trader's Almanac 2O11

42

BONDS CAN GO UP WHEN STOCKS GO DOWN

The vast majority of investors do not understand the nature of trading Treasury bond

futures. There exists an inverse relationship between yield and price. When yield or rates go

up, bond prices go down and vice versa. When investors feel threatened with a potential

decline in the stock market, they allocate more money into bonds. This is often referred to

as the “flight to safety” trade. Investors will also

allocate more money to bonds when they believe

the yield is more attractive than other shorter-

term investment options.

There is no doubt that both of those condi-

tions were met in late 2008 through early 2009.

However, even in that unprecedented time, 30-year

bond price action did respect a seasonal supply-

demand cycle. By going long the September

30-year bond on or about April 27 and exiting the

position on or about August 22, we discovered in

the last 32 years a solid 68.8% success rate. This

trade has a history of 22 wins with only 10 losses;

the largest win was $8,563 in 1992, and the largest

loss was $5,906 in 1999.

The 2009 stock rally off the bottom of the worst

bear market since the Depression drove bonds lower.

However, if one waited and used timing tools, losses

c

ould have been averted, and gains achieved. In

2010,

as we were working on this edition, this trade

was conforming to the seasonality, as stocks suc-

cumbed t

o a decline. Investors were ...