For nearly a year, Seeking Alpha has been rife with recommendations to short treasuries, since interest rates were too low, and especially since the over-extended borrowing for TARP etc. would have to lead to higher interest rates.
Many investors have tried this strategy and gotten burned—not least, Bill Gross. Marc Faber calls it "the short of the century".
For simplicity, I'll consider only long-term treasury bonds, represented by the ETF TLT (Too Long Treasuries?), and shorted by the double-inverse ETF TBT.
The 2008 bottom for TLT was 85.71 in mid-June; it trended up gradually until mid-November. That was not a good time to be short: TBT stayed close to 70 in June, but closed at 55.84 on Nov. 19.
Then came the panic in the equity markets, and the "flight to safety" rally in Treasuries. TLT ran from 95.54 on 11/17 to 122 a month later. That's when you really didn't want to be short.
However, people who shorted in December did well. It was easy to see the parabolic, unsustainable rise in TLT; TBT could be bought at Christmastime for about 36. The bubble collapsed, forming a neat head-and-shoulders pattern, and the wise TBT buyer cashed in at about 47 in early February.
Yet Treasury rates are still low; some analysts are still pointing out the inevitablitly of inflation and rising rates; and SA still sprouts articles each week that recommend shorting treasuries.
I recounted the prior history to bring home the point that understanding the fundamentals and having the right trade is not enough; it doesn't work unless you also have the timing right. Just ask anyone who invested on Peter Schiff's advice last year.
This is not the time to play with TBT, unless you happen to catch a great one-day window. Even if your thesis is right and TLT will drop more, TBT's inverse-leverage mechanics can produce losses due to the day-by-day volatility. This is illustrated by its recent performance. As I write, the price of TLT is just 1% above its close 2 months ago on 2/9; it's been in a narrow range of ±3% during this entire period. But if you bought TBT on 2/9, your 49.18 is now worth only 44.80--a loss of 9%. This was a low-volatility period; as the volatility of the index increases, the losses in the derivative (due to daily tracking adjustments) can increase dramatically. So, waiting until the fundamentals go to work is not a viable option. It might work, eventually, if you can short the bonds directly, but not with a leveraged fund.
But there's a more direct and overpowering reason that shorting treasuries will not work in the short run, or any time soon: the Fed is buying. On any given day, in or out of market hours, if the bonds are too cheap, the Fed can simply buy them up and drive yields down like a rock. It would be a wipeout for TBT; and it's most likely to happen when prices start getting soft. So there's no plausible upside for TBT, and no plausible return commensurate with this risk.
Eventually treasuries will come down, but when? The most likely catalyst would be a reversal of the "flight-to-safety," which will happen when there are better, safer yields elsewhere. So why tie up your money with the risk-laden derivative?
That doesn't mean that TBT is off-limits for a day trade; I just don't want to hold it overnight ever again.
Disclosure: No positions