While numerous headlines are screaming about the ever-higher government yields, seemingly the trend is losing a bit of steam. 

Very often when a trade is front-page news, it is near some inflection points. The short-bond trade is no different. 

Why? Look the US WTI crude prices. It was the 50% gain there ($70 to $105) which eventually sparked panic selling in the bond market. Recently prices have broken down beneath the neat uptrend support (Chart 1). This suggests gradual waning speculative demand for crude.

Smart investors who anticipated a leap in inflation in the summer would have got in on the short-bond trade and profited massively. But would the same traders initiate the same position in Treasuries now?

I doubt it. Upward momentum is subsiding in energy. Motka city in Yemen is recaptured; key diesel stocks are being released. This may lessen the global inflationary outlook. 

Moreover, yields are hitting the highest level since 90s. Many investors haven’t been offered yields this juicy for many decades and are picking up debt at a good pace. 

The short-maturity debt are particularly in demand due to limited duration risk. 

If we look at US corporate bonds, many have taken a big hit over the summer. The iShares iBOXX $ Investment Grade ETF (LQD) slumped nearly 8 points to trade near its major support level (Chart 2). 

According to the fund’s latest figures, yield of this ETF now topped 6%. This is not too bad a compensation given potential technical support and good-grade corporate issues. 

Of course, one may remember Bill Gross's recent downbeat take on bonds (FT, £): “don’t own bonds, with the exception of one-year Treasury bills, which are now at 4.55 per cent.”

But, another strategist - Robert Buckland - is viewing these chunky yields with keen interest (FT, £):

Investors (In US) can currently sell the S&P 500 on a 1.1 per cent dividend yield to buy future real cash flows via 10-year Treasury Inflation-Protected Securities yielding a real 2.9 per cent.

In other words, investors should probably switch from those high-priced US stocks and replace them with long-term US Treasuries that guarantee good (real) cash flow in the coming years.

There is a potential contrarian trade in the debt market. But, again, this is not for everyone and certainly should not lead to a full ‘all-in’ type position size. The Fed is eyeing more hikes in the horizon.

Unfortunately hyped-up equity investors aren’t really listening. They still locked in that ultra-bullish mode. They look at Microsoft (MSFT) and ask ‘what’s the problem?’ (Chart 3)

In fact, MSFT, META, NVDA - are all nearing their peaks (again). In fact, NVDA just hit new all-time highs this week, pushing its market cap a step closer to $6 trillion. Even SpaceX (SPCX) has rallied 70% from its summer lows.

Meanwhile, semiconductor and memory stocks - as proxied by SOXX and DRAM ETFs - have rebounded back to their summer ceilings.  

These in-demand AI companies are carrying Nasdaq to record highs. And leaves many bearish market forecasters scratching their heads. If Big Techs can withstand 6% rates, can they actually keep going up until yields hit 8%?

That would be quite a spectacle to watch: Gravity-defying tech equities rumble on while investors flee shaky government debt. 

For now, market liquidity remains plentiful, although that may be about to change if rates stay ‘higher for longer’. 

Last week, I mentioned about the potential of a downswing in commodities. This view has not changed. Of course, within the entire sector there are some individual commodities that are going up and some going down. 

For example, palladium is falling into its major support at $1,100 while sugar has broken out to new multi-month highs. (Chart 4) 

If interest rates stay elevated around the world, demand for commodities may contract due to higher financing costs for capital spending and investments. In today’s FT, a big headline reads: “Surge in borrowing costs hit corporate America”. (6 Oct)

But that is a factor to worry in the future. For now, investors are busy at making money from those in-form AI stocks and dumping bonds. For contrarian-minded investors, perhaps buying some bonds on weakness and selling stocks on strength may be a reasonable choice.