Double Your Profits When Treasuries Tumble

If you’re like me and reluctant to join the stock market frenzy with open arms, then consider buying reverse index funds that bet against Treasury bonds.

This strategy offers a high value alternative to joining a 50%-plus stock market rally since March as long-term interest rates rise on most days when the stock market climbs.

As stocks soar, investors continue to unwind safe-haven positions in staid, low-yielding Treasury bonds – a trend that won’t end any time soon unless the economy sinks into another nosedive. TBT, or the ProShares UltraShort Barclays 20+ Year Treasury Fund, provides twice the inverse performance of its benchmark; it’s definitely a volatility-based strategy but also one that holds merit because the post-1982 bond bull market is dead…

Golden Cross; Bullish on TBT as 27-Year Treasury Bull Screeches to A Halt

In an age of violent global capital markets, I reckon major holders of Treasury debt like the Chinese and other emerging market central banks will increasingly grow tired of playing this game of chicken with the United States. Though I remain bearish on the economy – we might see another economic contraction next year or in 2011 supporting T-bonds amid a panic – the longer-term picture is incredibly bearish for Treasury bonds.

Basically, America consumes about 20% of China’s exports and the Chinese in return buy Treasury bonds to recycle their devalued dollars, which they earn through trade surpluses. Just how long will this quid-pro-quo situation continue is anyone’s guess; yet you’ve got to believe the Chinese are getting fed-up with financing America’s trade imbalances – now overwhelmed by massive budget deficits.

The credit crisis smashed most financial assets (stocks & bonds) and hard assets (commodities & real estate) in 2008 – truly an unprecedented decline of historic proportions. On a percentage basis, stocks were hammered the most from late 2007 until February 2009.

Yet, I suspect that the next financial crisis might be triggered by a dollar crash and/or a funding gap at U.S. Treasury auctions whereby the government can’t sell its paper.

This would be a remarkable event, to be sure, and most analysts would concede it’s impossible that America wouldn’t attract debt financing. But it is possible. The Fed can’t possibly buy (a.k.a. monetize) every government bond auction. It doesn’t have the resources. This trend is already in-play in 2009 as Treasury struggles to sell some of its paper – even shorter maturities.

A Treasury bond crisis might also precede one of the biggest U.S. dollar bull markets in history because it would probably coincide with a deficit consumption tax to fund America’s skyrocketing debt levels. This tax or a VAT, if you will, would throw enough fuel to ignite a dollar bull market inferno; naturally, the interest on the national debt and the outstanding value of all aggregate deficits will never be repaid in full.

Still, the dollar has declined for the last eight years and it would seem probable to me that the next financial crisis will be unleashed by rapidly growing American deficits causing the last leg of this dollar crash or multi-year decline. At that time I would expect foreign governments to pressure the United States to act.

Of course, a natural progression of this theme is gold. If this scenario materializes – and it’s inevitable the way we’re spending now – then gold has yet to see its finest hour. I also highly doubt most foreign currencies would outpace gold in this scenario. They’re all just as bad as the dollar.

Comments

[Mad Hedge F...:]

Or more. ) Ben Bernanke’s hands are so tightly tied that there is little he can do to head off stagflation, that recurring nightmare from the seventies. The $1 trillion he has added to the monetary base is certain to bite back the second there is an uptick in bank lending. Government crowding out has to push bond interest rates a lot higher. A budget deficit of 13% of GDP this year is about as inflationary as you can get. It’s time to take another look at gold, silver, and the short US Treasury bond ETF (TBT), which I recommended at the beginning of the year at www.madhedgefundtrader... before its awesome 70% run. For more on the risks posed by the stagflation monster, please click here at www.moneymorning.com/2.../

Aug 06 03:50 PM

[RiskReturnO...:]

There are starting to be rumors of FED stop buying treasuries to bring down yield ... and more and more auctions rest of this year ... with any GDP growth, inflation expectations will increase, supporting rising treausry yields ... TBT looks great until $60 or 10-year yield of 4.0% (PIMCO ceiling) ... we can revisit this case when that price target is hit.

Aug 06 06:19 PM

[prairiedog555:]

When I look at charts, certainly not an expert, it would seem that a better foil to the dollar/us tres would be FXA, plus it pays a dividend.

Aug 07 07:20 AM

[milkchaser:]

What makes FXA better (besides the dividend)?


On Aug 07 07:20 AM prairiedog555 wrote:

> When I look at charts, certainly not an expert, it would seem that
> a better foil to the dollar/us tres would be FXA, plus it pays a
> dividend.

Aug 10 07:17 PM

[prairiedog555:]

It seems to be exact, or close, inverse of USD, and of course it pay a dividend 4.5%.
And check out the yahoo chart on FXA as compared to the popular ETF EWA (AUS) it has done much better.
I am conservative and hesitate to invest in currencies, but this one seems to be a proxie for AUS economy, and AUS seems to be a pretty stable place. I guess I have a investing long term philosophy/direction I have formulated, I want to invest in PRODUCING nations, AUS, CAN, BRAZILE, not consumers like US and EUR.

Aug 11 06:11 AM