Bonds are a key indicator of the health of the risk trade. So long as treasuries are shunned and junk is bid, it is likely that stocks and the commodity complex hold up. This week, long-dated Treasuries have gained a couple more points as junk bonds continued to lose their mojo:

Source: google finance

Here are the same ETFs going back to the start of the bear market in stocks. You can see that despite a huge correction in 2009, treasuries are still over 20% ahead of junk:

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The collapse of the long bond has been eagerly awaited since 2007, and TBT (the 2X short bond fund) is still often mentioned in online chatter. The crowd is almost never right about these things, so I suspect that T-bonds will remain strong for the next leg down in stocks.

2008 was just been the “first look” at what can happen in the aftermath of a debt bubble — why couldn’t the same price action continue as risk in priced in again? Even if 2008 turns out to have been the “Prechter point” of greatest recognition and panic (and not what is coming), I doubt that many final price extremes were set last year.

For the yeild on the long bond, at the very least I expect another dip into the sub-3.5% area (it’s 4.5% now, and it touched 2.5% a year ago). Then we can talk about setting up long-term short positions for a secular (15-30 year) bear market.

At any rate, if think yields are going up from here, you’ve got much better odds with shorting corporate or municipal bonds, since those things are priced for perfection and defaults are going to be rampant. Even if treasury yields stay flat or go up, weak credit should collapse.

Oh, and if you just can’t wait to short long-dated sovereign debt, how about Japan at 2%? Or Greece at 6%? Or Spain, Italy, Ireland… all of this stuff is in trouble. Why pick the senior currency?