How to predict and trade the bond market

I’ve been thinking about how to predict short term fluctuations in interest rates (and the bond market) for a long time, but I could never figure out a quantitative way to do so. The “breakout/breakdown trendlines” stuff seems no better than making a 50-50 guess.
I recently stumbled across this idea, and it seems to work.

The data is from Yardeni.
What this tells you is that interest rates’ short term fluctuations are heavily influenced by short term fluctuations in the economy.
*Notice how the chart uses the 13 week change in 10 year Treasury yield. This is because 13 weeks = 3 months, and the Economic Surprise Index uses 3 months of economic data.
The way to trade this is to go contrarian at the extremes. When the Economic Surprise Index hits a bullish extreme, you should wait a little before turning bearish on interest rates. When the Economic Surprise Index hits a bearish extreme, you should wait a little before turning bullish on interest rates.

8 comments add yours

  1. Hi Troy
    Unexplored territory for me, but very interesting.
    Which leveraged ETFs would you suggest to operate long and short?

    • I’m not entirely sure Carlo. I’m focused on predicting this market first. Try TNX? That isn’t leveraged though.

  2. Interesting but, according to your style, why don’t you try to quantify a little?
    thank you Troy

  3. Trade the bond market is something very interesting to do while there is a Bear market and the SELL signal from the Medium-Long Term Model has been issued.
    As you said that you’re focused on predicting this market I guess that still you haven’t finished to define the bond trading model. But after you finish it, as I already suggested in other post, will be interesting also to make this and other models easy for subscribers. I mean, for instance, each subscriber could also “subscribe” to some specific model (the Momentum+Contrarian model, the “How to be safe at the top of a bull market”, the “Improving the Golden/Death Cross Model with Initial Claims filter”, or this bond model.) You could use mailchimp or some other easy way to send emails to some specific subset of subscribers, with easy actionable instructions. For instance, to subscribers at this model, something like an email with “sell TLT, buy IEF”, or “sell LQD, buy SHY” or so.
    This is just a suggestion to improve the service. I’m sure that lots of subscribers would be very happy with this kind of easy alerts 🙂

    • That’s a terrific idea Alberto!
      I’m creating a short term trading model too. I think it’s a terrific idea to let members subscribe to models of their choice.

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