Bonds: Don't Fight the Trend

06/12/2012 11:40 am EST

Focus: BONDS

Joe Kinahan

Chief Market Strategist, TD Ameritrade

Market veteran Joe Kinahan, the Chief Derivatives Strategist for TD Ameritrade, warns that those looking for a bond-market top should remember what the market does best.

Well, bonds have had a great rally here over the last several years, and whenever they’ve been going up for a long time, they start talking about where is that top? Our guest today is JJ Kinahan to give us some thoughts there.

So, JJ, we’re hearing more and more articles about is this a top in bonds? Sometimes this can mean we’re not there yet because too many people are talking about it. What are your thoughts?

Well, I think that actually as we’ve seen over time, historically in any product when everyone says we should go one way, I always joke with people that the market has one job, and that’s to screw each and every one of us individually every day. But quite seriously, you know, as we look at bonds right now, I think that those who are trying to predict tops, predict bottoms often fall into a trap.

The ways I think a lot of people are looking at it that have had success are saying what’s the range? Like if you look at the ten-year range, the ten-year yield is at a nice 1.7% to about 2.25%, and the folks that I know that are having success are trading inside that range. When you get to 1.7%, yeah they’re not going to necessarily pick the high tick on bonds. Maybe they’ll bet against them and on the downside, the same way.

What I think you need to do is really say OK, when you have a predictable range, you do know the government has been so involved here in terms of support. Do you want to catch the falling knife or in this case, predict the absolute top?

What are you looking at most importantly when it comes to bonds? What kind of outside of that, whether it be the dollar or something else, can it lead to an idea about how to trade bonds?

Well, I think one of the things that you’ve had to look at if you’re going to have success trading it over the last year and a half or so, has actually been the stock market. It’s been a very high negative correlation with what’s going on in the stock market, and it makes sense.

But we’ve seen perhaps even stronger levels than normal because people are so afraid that you’re seeing stock volumes are not what they once were. I think part of that being is people are comfortable maybe only making 3% or something like that over quite a few years, or as we talked about the ten-year, 1.7% or 1.9%. What that tells me is that the money is so much sensitive to what’s going on the equity market and afraid to move out of there.

So as I said, there might be a little bit of support. But as we saw when the S&P went up to 1,400, there was starting to become that little reversal of money.

And in terms of the Fed and watching them in terms of bonds, they’ve said they’re not going to change interest rates here until 2013. Do you believe that, or is something coming in June?

I would think that they’ve been so much more transparent in everything that they have been doing. Barring some crazy major event, and again, we can’t predict what that may be...all other things being equal, I don’t see a reason to doubt what they tell us.

And then finally, the way to trade bonds. What do you favor here, whether it is an ETF or bonds directly, what?

I think that for many of the retail traders, again, if they’re comfortable trading futures bonds, ten-year futures are great. Some of them are so much more comfortable in ETFs and they understand them a little bit better, TBT and TLT are also very interesting products to trade them.

So again, for those of you that aren’t as familiar with trading the futures, I would avoid them. Get comfortable with them first before you trade them and stay with the types of products you know. The ETFs trade like stock and people are familiar with them.

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