(This guest post comes courtesy of The Mad Hedge Fund Trader)
Get Ready for the April Surprise. I have a feeling that the markets are on a final countdown, but don’t know it yet. No, I am not talking about the next issue of the TV show 24. On April Fool’s Day, the Fed brings to a close its $1.25 trillion program to prop up the mortgage market in which essentially all home mortgages are ending up, either directly or indirectly, on the books of our esteemed central bank. As we approach this rendezvous with destiny, a growing number of hedge funds are piling on the short side of the bond market, betting that nobody will be there when the purely commercial market is reborn. It harks back to an old Wall Street saw that “Success has many fathers, but failure is an orphan”.
I expect stocks to rally until then, bonds to grind down, and yields possibly climbing as high a 4.00% on the 10 year Treasury bond. This pessimism will drag mortgage rates up 15-25 basis points. The government will help the process along with increasingly bloated new issuance. This is a good reason why the credit markets have become ultra sensitive to developments in Japan, California, Dubai, Greece and other PIIGS (oink!). Seasonally, we are in a period of weak bond prices. To really throw the fat on the fire, the highly anticipated March nonfarm payroll, the number of the month, will be released the next day. When everybody and his dog is positioning for something to happen at a certain time, you can count on either the opposite to happen, or for nothing to happen.
I vote for the former. After all, who is overweight mortgage backed securities these days? The market has been closed for 18 months, and everything institutions still own is probably down by a third in value. Look for an upside surprise in the nonfarm payroll report to produce a peak in equities and bond yields, an intermediate bottom in bond prices, and a reversal of everything from there. My bet is that the drastic jump in home mortgage rates that many are forecasting for April is going to do a no show. This is just a humble trader’s musings.