Time to Short Long Term Government Bonds Now

Markets have been pretty active and there are some very good trading opportunities on the horizon. In my opinion the trade that makes the most sense in risk/ reward terms is to short the US Long Term Government Bonds.

Some very experienced macro managers like Jim Rogers, Marc Faber and Doug Casey have been expressing their concern about an eventual collapse of the US bond market

Jim Rogers is bearish on the US Bonds and recently said that “I cannot conceive of lending money to the United States. I will tell you that anybody who buys government bonds is making a terrible, terrible mistake. If I were you, I’d go home and sell your bonds. And if you happen to be a bond portfolio manager, I would urge you to get another job. You’re in the wrong place at the wrong time."

When questioned about investing in bonds, Peter Schiff also expressed his bearishness, "The bear market in stocks that has been going since 2000 is going to continue for many, many years. But we have to understand that the bear market in the bonds which has not even begun yet is likely to be even worse over time. "

And Dr. Doom, the legendary swiss investor Marc Faber, told Bloomberg recently that he recommended investors to short U.S. Treasuries, as a 27-year bull market likely ended in December, starting the beginning of a long bear market.

Doug Casey was even more emphatic than his peers and thinks:

The best thing the US Government could do is to default on its debt. That’s one of the things that should be done now; the U.S. government should default on its debt. This is shocking for people to hear, but it wouldn’t be the first time the U.S. government has done that. It did that almost at its founding in continental days. This debt represents a tax liability that’s being foisted off on the next generations who have no moral obligation to pay and should not pay. I think as an ethical point, the U.S. should default on this debt. It’s impossible to pay it back, and it won’t be paid back. It’s more honest to acknowledge that bankruptcy now as opposed to pretend it’s going to be paid back.

This seems to be an almost perfect trade, with low risk and a very big potencial reward.

Stock position: None.

Comments

[Chris of NH:]

I concur.

If you read McDonald's analysis yesterday they spoke of continued pressure on commodity prices and the current strength of the dollar that they anticipate will reduce profit by by 7 to 9 cents per share in the current quarter from their projection.

The commodity price increases that their analysts see continuing are the leading indicators of high to hyper inflation down the road... typically in a severe downturn/depression commodity prices plummet, but not so this time around.

The jump in inflation, I predict, will become evident around 7/1 as unemployment approaches 10%. We already see it in gasoline prices and if you look closely at canned food at the grocery store you'll find they are often a little smaller and yet prices have not fallen in step with the decrease in portions.

Mar 10 08:21 AM

[kelm:]

I have been short for nearly two months through PST and TBT and it has been a difficult ride though profitable. Looking at the charts though the day to day up and down is ending and bond prices are headed lower. A couple of points:

1) Supply is the overriding issue - way too much $2+ trillion this year vs. $480 billion ish last year in a world awash with government debt

2) US fiscal position. As Rogers, Faber et al note we are debasing the currency dramatically and that will lead to inflation. In January foreigners were net buyers of Treasuries while American funds were net sellers.The locals are generally ahead of the curve when something is going to go wrong. I always remembre Rogers saying during the Asian crisis, "a currency crisis happens when the locals are selling because they have most of the money".

Finally, if we do get a bear market rally this week as I believe we will we will see money come out of gold and treasuries and flow into equities ad oil.

Disclosure: PST, TBT, DZZ, DXO

Mar 10 09:42 AM

[samwise:]

still. gotta watch out for the Fed. They can purchase this debt and since they can print money they can purchase A LOT. Obama and the current democratic leadership is a problem. Having listened to 'helicopter Ben' this morning i got the feeling he might be getting a little Rambo in him. Be interesting to see what happens when the nominations for a new fed chairman come since Ben's term expires soon. My guess for Obama's nomination is Laura Tyson so she can institute the "Zaire Plan." We'll see whether or not BO can get his "dream ticket" or not.

Mar 10 11:21 AM

[User 143167:]

If the Fed does buy long T-bond through money printing, the monetization will tank the dollar immediately.

Mar 10 11:38 AM

[Mad Hedge F...:]

Right on!! My top pick of the year, the Lehman Power Shares Ultrashort 20 Year Plus short ETF (TBT), which gives you a 200% short play on long government bonds. It has been absolutely roaring, hitting a high of $49.5, up 37% from my recommended buy a month ago. With a $900 billion stimulus package, and a $2 trillion “bad bank,” piled on top of a $700 billion TARP, it is clear to everyone that the government is about to flood the debt markets with paper. The US money supply M2 is now growing at a breakneck 20% rate and is accelerating. This trade has further to run.

Mar 10 12:20 PM

[User 319940:]

OK, short US Treasuries. I can understand that.

What about treasury inflation protected bonds? How to they fit into the scheme of things?

I'm long TIPS and would consider shorting long term treasuries at the same time. Does this have merit?

Thanks in advance

Mar 10 12:57 PM

[AndrewBaker:]

The time to short government bonds is when interest rates start to rise, which will not be for a long time yet: but when it comes, wow, there will be a doozy of an inflation hike and shorting bonds then will be the way to go.

It's such a shame that the current financial problems will be visited on our children and grandchildren in the years ahead: it will be them mainly who will pay both the interest and capital on the $billions of bonds being issued now as part of the supposed rescue of the financial system.

Mar 10 04:20 PM

[guychan:]

Any notion for shorting US bonds from another currency (ie home currency is not USD)? May sound silly, but it seems to me that once the USD starts crashing, it negates any benefit that I may harvest from shorting the USD-denominated bonds. Does this make sense ? Thanks to anybody who can clarify...


On Mar 10 04:20 PM AndrewBaker wrote:

> The time to short government bonds is when interest rates start to rise, which will not be for a long time yet: but when it comes, wow, there will be a doozy of an inflation hike and shorting bonds then will be the way to go.

Mar 10 07:32 PM

[polo:]

If we don't default, we inflate. No other way out. Why do not we have a high inflation target, say 8%? That will stop assets falling. Everyone has a 8% cut. Time to accept a lower living standard. It is silly try to save and pay back $1 million debt, when the debtor is making 80,000 a year and there is no collateral on debt. Credit rating on this debtor is poor anyway. Same is true to a nation. Negotiate with China and Japan, time to forgive some debt or we will inflate it.

Mar 10 11:28 PM

[jeerio:]

there will never be the political (or social) will to default - there will be inflation. interest rates will need to rise again, and andrewbaker is correct, that's when to agressively short long treasuries. i made 20% on TBT in Janaury, but am waiting before getting back in again.

besides just trading the market, best thing to do until that time is begin small positions in oil, gold, dollar negative and ag etf's, then ramp them all up at first sign of interest rate hikes.

Mar 11 12:38 AM

[tclwrap:]

about this $2T bad bank and it's toxic assets. Suppose the gov. provides loans to banks in exchange for toxic assets. When the economy improves, or the company is on strong footing, they pay the money loaned back in exchange for the same assets. The Fed disposes of the money. In that case, the banks live along with their assets, and the inflation does not happen. Would that be a possibility?

Mar 11 02:35 AM

[guychan:]

Andrew - belated thanks for the reply, which I had somehow missed until now.

Thanks


On Mar 10 07:32 PM guychan wrote:

> Any notion for shorting US bonds from another currency (ie home currency
> is not USD)? May sound silly, but it seems to me that once the USD
> starts crashing, it negates any benefit that I may harvest from shorting
> the USD-denominated bonds. Does this make sense ? Thanks to anybody
> who can clarify...

Apr 17 10:11 PM