Saturday, November 24, 2007

Bonds have spoken

The bond market dwarfs the stock market. It's also generally considered that bond traders are a more savvy lot that stock traders. You don't really find Joe Sixpack trading bonds. These markets are the dwelling place of institutional investors aka the smart money. When the bond market starts talking it's usually a good idea to listen. Well the bond market lately has been doing more than talking it's screaming at the top of it's lungs. Notice how the bond market rolled over in early 2000 just prior to the market topping out. This is usually the case about 90% of the time. Bond traders will spot problems on the horizon before stock traders and start allocating capital to "safe" investments. Now take a look at the 3 month T-Bills. What we see happening in the last few months is an unprecedented flight to safety. This move even makes 98 look tame. Remember the upheaval in 98 produced a 20% correction in the market. What does the current state of the bond market say about the future I wonder?