The Treasuries Craze as Window Dressing

I want to propose one more explanation of the current bubble in Treasuries. It was noted that the current prices of Treasuries can be explained by financial panic, the possibility of a Great Depression 2.0 or a combination of both. I also noted here that between August and October the dollar and Treasuries were both going up and after mid-November the dollar was more or less stable, when Treasuries shot up sharply.

One theory which can explain the current growth of Treasuries (which means drop of yields) is window dressing. Funds which lost big on commodity and stock markets this year need to show that they are currently in safe investments. What can be safer than Treasuries! And the total size of those funds is enormous. There are trillions of dollars in various pension, endowment and sovereign wealth funds. They were managed badly, invested a lot of money in commodities in the last and first half of this year, lost huge amounts and now desperate to show investors that their money is safe. And because this money was invested in dollar denominated assets before, these funds don't need to buy dollars, hence dollar stabilization.

I still don't discount financial panic and Great Depression 2.0 (or Great Recession). But I want to play on the window dressing theory. The easiest way to do this for an individual investor is to go short iShares Lehman 20+ Year Treasury Bond (TLT) or, better yet, go long UltraShort Lehman 20+ Treasury ProShares (TBT).

I'm planning to buy some TBT shares going into the year's end and sell in the first half of January. There is some risk still, so due diligence still applies: buying small positions on the way down and selling at the first sign that trade might go wrong.

Full disclosure: At the time of publication author had no positions in TBT, TLT or any other stocks related to treasuries. Positions can change any time.

Comments

[Steve in TN:]

"...planning to buy some TBT shares going into the year's end and sell in the first half of January."

Why only a couple of months trade? Are things going to be that much worse next year?

2008 Dec 11 08:57 AM

[Alan Young:]

The theory has merit as an explanation, but I don't see how you get to the next step--using it to predict the bursting of the bubble. Are big financial firms going to decide in the next week or two that they no longer need clean balance sheets?

2008 Dec 11 09:08 AM

[Alex Filonov:]

When I wrote this, I didn't know that Doug Kass thinks the same: www.thestreet.com/stor...

2008 Dec 11 11:35 AM

[Roger Knights:]

It makes sense--it's surprising this explanation hasn't been suggested by others. I guess they aren't cynical enough. (This explanation has given me the nerve to short TLT shortly.)

2008 Dec 11 11:47 AM

[Thomas Smic...:]

I have been pondering TBT for purchase. I think a modest amount is a great hedge against the Obamanation of our US Treasury Gone Wild.
Not that the current administration and Congress are any less guilty of this practice.

2008 Dec 11 02:52 PM

[johnnysize:]

This is a joke. TLT is overvalued becasue the underlying are not available in the marketplace. Why do you think the put skew is such?

2008 Dec 12 11:49 AM

[boldej:]

There is no current "bubble" in treasuries. There will never be a bubble in treasuries. The typical causes of bubbles, greed, "the greater fool theory", excessive monetary liquidity, etc. do not now and will never apply treasuries. Treasury yields are a realization by the rational marketplace that deflation and depression are a near certainty.

2008 Dec 13 10:49 PM

[delta2210:]

I recently came across TBT and I think it is an excellent plan to profit on the ridiculous financial policies of this country. I am not extremely educated on exactly how TBT shorts treasury bonds, but I would like to know what would happen to TBT share prices if the government defaulted on its debt?

2008 Dec 14 11:16 AM