Treasury Market Now Entering The 5th And Final Stage Of Bond Investor Grief

The Business Insider ^ | 8-22-2010 | Joe Weisenthal

[blam]

Treasury Market Now Entering The 5th And Final Stage Of Bond Investor Grief

Joe Weisenthal
Aug. 22, 2010, 10:03 PM

Talk of a bond market bubble may be a lot of hot air, but the incredible bull run in treasuries is undeniable.

So where are we in the cycle?

Nomura strategist George Concalves likens the run to the 5 stages of grief:

Basically, the market has gone through five stages in this rally to lower yields:

1. UST ―Denial Rationale: At the start of the year, shorting the US Bond market was viewed as the killer trade, with investors looking for inflation around the corner and the curve to hyper steepen.

2. Enter the ―Anger Phase: The mindset is well…that didn’t work, but wait until the Fed stops buying MBS in March 2010. And, with all that UST supply, rates are definitely poised to head higher.

3. ―Bargaining View Points: Okay…maybe yields will at least stop going down so fast…so instead of expecting higher rates, market forecasters then compromise by lowering their yield targets.

4. Shorts in ―Depression: Market participants become indifferent on the level of rates as they close shorts and become more neutral after quarters of being bond bearish.

5. Bond Bears in ―Acceptance: Last stage in a rally cycle, when most market participants accept the reality of their loss and become bullish on rates.

We think that we are towards the end of stage 4 and starting stage 5. At this juncture, it’s difficult to recommend adding to duration, so we are keeping our neutral stance on duration over the medium term and would rather play for flatteners. Furthermore, for investors that have been in our bond bullish camp, we recommend slowly taking profits in the belly and looking for better entry points.

[snip]

[MrEdd]

[Hostage]

Can you or someone explain a few terms in bond trading?

“adding to duration”

“play for flatteners”

“taking profits in the belly”

TIA.