Speculators are making what seems like the obvious trade…

They’re betting against bonds in a big way. And on the surface, that makes sense.

The Federal Reserve plans to hike interest rates multiple times this year. Since bonds and interest rates are inversely related, that should be bad news for bond prices.

The problem is, betting against bonds is already a crowded trade. Bearish bets on long-term bonds recently hit levels we haven’t seen in more than a year.

That makes this obvious trade dead wrong. And that bearishness alone could send bond prices up double digits this year.

Let me explain…

There’s rarely a consensus bet in the markets…

However, at certain moments, investors all start believing the same thing. And when that happens, betting against the crowd is the right move.

That’s the opportunity we have today in long-term bonds. We can see today’s bearish sentiment through the Commitment of Traders (“COT”) report for 10-year bonds…

The COT is a weekly report on what speculators are doing with their money in real time. This indicator doesn’t normally show us much. But lately, speculators are betting against bonds in a big way. And that makes it a useful contrarian signal right now. Check it out…

Speculators went from a multiyear bullish level to bearish in a few months. Now, bearishness on bonds is the crowded trade. And making the same bet as these investors hardly ever pays off…

We saw a handful of other bearish setups like this over the past decade. The most recent example was in September 2018. At the time, bets on lower bond prices were at an all-time record.

Bonds didn’t fall, though. Instead, they took off… The iShares 20+ Year Treasury Bond Fund (TLT) rallied 24% over the next year.

That’s not the only example of these speculators getting it wrong. In January 2017, we saw a similar bearish setup in bonds. Bets on lower bond prices were at the highest level we’d seen in years.

Again, though, bonds didn’t fall. From mid-January through September 2017, TLT was up 8%. It was another great time to buy bonds… not sell.

It was the same story in late 2014. Speculators were betting against bonds at near-record levels. Then, bonds soared in the following month…

TLT was up 12% from late December 2014 through January 30, 2015. The fund pulled back a little bit after that initial rally. But it was still in positive territory by the end of the year.

Hopefully, you can see that you don’t want to just follow the crowd when they’re all betting in the same direction.

Today, the crowded trade is to bet against bonds. History shows us that’s a bad idea. And a short-term rally in TLT is likely from here… with 20%-plus upside potential.

So if you’re looking to make a contrarian trade to start the year, this is one of the best opportunities out there. And shares of TLT are the simplest way to bet against the crowd.

Good investing,

— Chris Igou

Strange change at your bank [sponsor]
At least 41 major US banks have just made a drastic change to the way money in America works. It could have some major implications for you, your money and your retirement. But it's crucial you understand what's happening, before these changes get applied to your bank account. Here's everything you need to know.

Source: Daily Wealth