Why I’m selling bonds ahead of the Fed
Bond yields are destined to go higher—the only real question is how quickly.
It's been 15 days since the 10-year yield printed its 2.75 percent high. At that point in time, it was clear that Chairman Ben Bernanke was alarmed by the volatility and dramatic price action caused by the mere mention of the taper. After an aggressive, Fed-wide backpedal, they've been able to contain volatility and engineer stability.
My belief is that the Fed doesn't want long-term rates to go much lower than current levels, for fear that it could put us right back where we were a couple months ago, and create the potential for market shocks. So on Wednesday, I believe we will get mild taper talk which will move the market in the direction of the July 5th high in yields.
(Read more: Wall Street pros: Fall taper priced in...sort of)
So what's my trade?
If the September 10-year note futures trade 126.10, I will consider this a confirmation of lower prices, with an objective of 124.16. A subsequent trade to 127.00 would trigger a stop level and convince me that I am wrong.
The Fed's confidence in its ability to control the market's movements is high, and I think the ultimate goal is to ease us into higher rates.