Chart of the Day: Bonds' Reversal

click to enlarge

After months of heavy buying in Treasury bonds, driving yields down to record lows, the last couple of days has seen a pickup in selling. (When bond prices fall, yields rise, and vice versa)

I noted a couple of weeks ago that I felt the stampede into Treasurys was overdone, and I was looking to short bonds. My vehicle for implementing this trade was to buy the ProShares Ultrashort Treasury ETF (TBT). This fund moves inversely with long-dated bond prices.

I was a little early in putting this trade on, but a look at the chart above tells me my thesis is starting to take hold. Notice the huge volume spike accompanying Monday's action, signaling strong conviction. Also, after reaching deeply oversold territory, the RSI indicator (top) was turning higher.

With all of the money that the Fed and other central banks are printing in an attempt to reflate the global economy, long Treasuries will likely reflect at least some pickup in inflation at some point.

But the Fed is also buying long-dated assets, and trying to do everything possible to keep rates low to help stimulate the economy. That, along with near-term fears about inflation, are what make this trade tenuous in the short-term.

As such, I will likely trade around this position, but for now I am willing to see how far Monday's strong bounce can carry it.

Disclosure: long TBT

Comments

[Dan Lonowski:]

I bought TBT on 12/31, on same premise as yourself. Looking for a short-term trade, then a pullback as the Fed steps in to buy treasuries, which will be temporary before TBT continues its climb later in the year. Who knows? I might be right.

Jan 06 10:19 AM

[shootpar2001:]

This trade will be choppy, along with the overall market. Eventually money
will go looking for 'some' return. Look at the preferred funds, corp. bond funds. The volume is increasing steadily, smart money maybe lining up for
the return to risk. With many funds pricing in apocolyptic defaults; the returns may just outweigh the risks.

Disclosure: Buying different bond funds across the spectrum.

Jan 06 11:27 AM

[Credit Crun...:]

Yes, I first bought into this thesis at the beginning of November, but quickly sold TBT again once the 20 year bond started to rise.

I have recently bought into TBT again, but feel this is very much a momentum play - I'll be out again quickly if the trend reverses.

Jan 06 03:07 PM

[henarl:]

Bought TBT on 12-23 at $36.56, but immediately sold a Mar 38 call for $4 so I will have to be satisfied with a 16% profit in three months. I will buy more if it comes back to $38 or so.

Jan 06 04:20 PM