The Bond Rally May Be Ending Soon

Treasuries are on pace for the largest weekly advance in 17 months. The 10-year yield has fallen to 4.6%, the lowest level since March.

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I considered buying bonds during the spring as a short-term trade, even though I am bearish in the long-run. My rationale was that the economy was weaker than investors believed and disappointing economic data coupled with the Fed pausing its rate hikes would make bonds attractive. Furthermore, all other assets, including gold, looked overvalued and bonds would be a good place to park some cash until gold corrected.

Since then bonds have significantly rallied as the market realized that the economy is slowing and the Fed is ending its tightening campaign and may even soon cut rates. Gold has also corrected by 19% since its May high. At this point, bonds look a lot more risky to me though I would not be surprised if they continue to rally as the economy enters a recession next year.

My main fear is that foreigners, the largest holders of privately owned government debt, will eventually reduce their holdings causing rates to shoot up. Reading comments like those made recently by a UAE central banker, lead me to believe that its only a matter of time before rates start to increase again.

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