TBT is an ETF which corresponds to twice the inverse of the daily performance of the Lehman Brothers 20+ Year U.S. Treasury index. The fund normally invests at least 80% of assets to investments that, in combination, have economic characteristics that are inverse to those of the index. It also typically invests in taking positions in financial instruments, including derivatives that should have similar daily return characteristics as twice the inverse of the index. The fund is nondiversified.
Why am I saying it is going to become a goldmine? First the Fed has lowered its interest rates nearly to zero. It has very little room to lower them further. The bond yields are extremely low. This means they can really only go down in value. As the Fed raises rates, this should happen dramatically.
A second point is that all of the bailout monies have to be funded. They will be funded by bonds. If there is a surplus of those bonds, the bonds will have to be sold for less money (higher yield). This means the bonds will go down in value. Extra selling sessions have already been scheduled to allow for these greater numbers of bond sales. More seem likely to be added in the future.
Why am I writing this article now? Today the Bundesbank, the German central bank, had to buy up some of their own bonds at their sale. They could not sell them all for the first time in a long time. Even though people are scared out of their wits about the stock market, they could not sell all of their bonds. The German bonds are generally thought to be the most secure in the world after the U.S. bonds. If Germany cannot sell all of their bonds, it will not be long before the U.S. has the same problem.
Does this mean I am advocating a smaller stimulus package? No! It does not! We need a big stimulus package to get the economy going. We just need to be aware that we will have bond inflation. We need to be extremely aware that we will have to make the trade deficit disappear in order to have a prayer of repaying all of this money.
To do this we have to first get rid of our biggest trade expense, oil. I am hoping Obama gives his energy policy a high priority. It has to be a high priority for the U.S. economy to have a chance at health in the near future. In the meantime, an investment in TBT sounds like a very good idea.
Disclosure: Long TBT