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Interest Rate Sentiment & the Bond Market at Trader’s Narrative

Interesting day. So now the chatter on bonds has risen to a crescendo. Before it was the Chinese market, and before that the Yen. No matter what the market does, something is trotted out after the fact to try and explain it.

If this drop happened last week we would have been told it was China’s fault. And yet, the Shanghai market has fallen more than 20% and we’re still doing just fine (considering what happened earlier in the year).

A few amazing tells happened this week regarding interest rates. The brainiacs in Goldman Sachs’ (GS) economics research team threw in the towel. They had been predicting a total of 75 basis points decrease in the Fed fund rates since last September. Things didn’t exactly play out that way. Now they are saying that no cuts will be coming, even in 2008.

And just one day before GS’s about face, on Monday, it was the guys over at Merrill Lynch (MER) who had enough of predicting rate cuts. Their call was even more extreme, calling for a 100 basis point cut! But now they agree with their colleagues over at Goldman and are expecting no cuts going forward.

Which means that the sentiment landscape is becoming rather lopsided. Not many bond bulls around it seems.

The Commitment of Traders report is nicely bullish, although not at a historic extreme. The same can be said of all other tecnical and sentiment metrics that track the bond market:

    Consensus Survey: mildly bullish
    put call ratio of 30 year bonds: mildly bullish
    Market Vane Survey: neutral
    Rydex ratio: mildly bullish
    distance from 50 day MA: bullish

Unless we get a nice, sharp rally to reign in the bond bears, it could get real ugly. The worst is just dripping lower. The best is a nice sharp drop or a nice sharp rise - to signal exhaustion.

Considering the relative weakness of the banking sector, we better have some sort of resolution. And fast. Otherwise, the whole premise of a continuing bull market is once again up for debate.

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