Finally Time to Short U.S. Treasuries?

Do we finally have the opportunity that many of us have been waiting for...the mouth watering chance to short US treasuries?

First, a quick review of the fundamental facts, which we have discussed at length in this space.

On October 19, we outlined 7 Reasons to Short US Treasuries - and then we promptly went short long-dated US Treasury Bonds - both via the futures markets, and via ETFs.

Then on November 12th, we were pleased to read a separate analysis about shorting treasuries from Market Folly, one of our favorite sources of financial information, that came to the same conclusion - namely that interest rates are going to the moon.

Everything looked good, and even our buddy Jim Rogers was on the same side of the trade. We were so excited, we shorted a second contract quickly, dreaming of pyramiding our way into riches.

But a funny thing happened on the way to the penthouse - the financial world as we know it temporarily ended, and US Treasuries soared to all-time highs!

So what happened to our master plan? We had to cover our short position - before we ended up in the outhouse - and even Jim Rogers had to cover his!

All because a historic flight to safety sent the world heading for the cozy confines of US Treasury Bonds!

A big hat tip to Tom Dyson at DailyWealth, who made a very prescient call on November 24th that it could take some time for Treasury bonds to actually fall.

So what now? Today I took a quick peek at the 10-Year Treasury Note chart, and was delighted to see - dare I say it - a potential peak forming?

click to enlarge

Is this the beginning of a historic collapse - and shorting opportunity? Or will the flight to safety continue into the 1st half of 2009 - propelling Treasuries to even greater heights!

Has anything changed in this short case fundamentally, since our original thesis was formed? Well, let's see:

• The US Federal Reserve started printing money as fast as it can - can you spot the trend in this chart?
• And we've been bailing out every incompetent US company, to the tune of $8.5 Trillion!

I'd say our thesis for skyrocketing interest rates is still intact!

Of course, the market is always the final arbiter of who's right and who's wrong. So, we wait. For 10-year chart to break one way or the other - thus we're not short - not yet!

Comments

[Dan Lonowski:]

I bought TBT on Dec 31. We'll see if I was too anxious. Gained 10% so far...

Jan 06 10:07 AM

[SlickRick:]

Yeah, I'm pretty sured the b*stard has started falling (gaining if you own TBT)... It looks ripe for a small dead cat bounce. But where's our exit target on this one, speaking in price of TBT

Jan 06 01:03 PM

[John Lounsbury:]

Brett - - -

I have been suffering the same agonies as you have. As always, timing is crucial. There's an old saying (sorry, no attribution) that "markets can stay irrational longer than investors can stay solvent".

I am cautiously increasing my TBT holdings. To answer SlickRick's question, my exit will be by hitting stop loss levels maintained below nearest support. For the courageous, buy TBT and hold for the long term. There are two outcomes: (1) we go into a long depression and interest rates rmain depressed for years (dead money outcome) or (2) we over stimulate and inflation results with dramatically higher interest rates for a few years (big profit outcome). Even the dead money outcome will come to an end (or the U.S. and the dollar go away) and the result eventually is profit (if the U.S. survives). If life as we know it ends, items of personal survival are the only wise investments.

Jan 06 02:34 PM

[DannyBoy29:]

I just bouught TBT yesterday. I'm encouraged to see it up after the fed minutes where they mention pootentialy buying long dated treasuries.

Jan 06 02:39 PM

[dcb:]

I use treasury data, and stock date together with currency data to make my picks. time to get into this was a few days ago, rally looks like it is stalling, so I expect it to drop another day then maintain a while. we won't be out of the woods for a while. But, I don't see how it can go below the recent lows.

Jan 06 05:23 PM

[Brett Owens:]

John, great point on the risk/reward - a lot of potential upside vs. not much on the downside.

Jan 07 12:12 AM

[TBill:]

I bot TBT a few days ago and will watch for points to buy more. IF the 'dead money' senario comes to pass, with the Fed buying long dates, we won't make money especially if you subtract the inefficiencies of the ETF. However, as we have printed up and throw several times the inflation adjusted dollars FDR threw at the Great Depression ALREADY, I think the numbers are on our side.

Jan 07 02:15 PM

[wulfmeister:]

Seriously, You guys need to read the Barron's article in the Jan 12th issue regarding the problems with leveraged inverse closed-end funds, especially when holding long term. Think about it, if the index is at 100 and declines to 90, and you are in a 2x levered fund, then YOU are at 80. If then the index moves back to 100, you are now at 96. A tidy -4% LOSS. Day trade them, don't hold them. Over time this multiple only gets worse. This it NOT a long-term or even mid-term trade.


On Jan 06 10:07 AM Dan Lonowski wrote:

> I bought TBT on Dec 31. We'll see if I was too anxious. Gained 10%
> so far...

Jan 18 10:59 AM

[Daniel Braun:]

So considering the problems of using the leveraged TBT, what could be the best strategy for a long term short on US treasuries?

Jan 24 12:29 PM

[FrankieC:]

wulfmiester, I think you are incorrect. If the index declines 10% to 90, then you are at 80 in 2x leveraged fund. But if the index moves back to 100 you increase by 11.11% and you move back to 97.77. So, while bad for long term investing, you overstate its badness.

Feb 15 03:42 PM

[Jon Hagen:]

Potential Downside: What about the Fed's comments at the end of last year about them considering buying long term treasures (that TBT 2x shorts) as part of their quantitative easing activities (to keep the rates low so they don't borrow money at rates higher than they "have to")? If they decide to start doing that to keep the long term rates low you are not going to get the price declines you need to clean up with TBT. Even worse, depending on the size and longevity of the Fed's meddling, these already mentioned [by Ben] Fed actions could result in sending long term (20+) treasury prices higher and kill your investment in TBT. I am with wulfmiester.

Mar 01 07:16 PM