Shorting U.S. Treasuries: The Best Trade of the Next Decade

Dec. 4.09 | About: ProShares UltraShort (PST)

There is a single chart that makes me a giddy as a young investor that will, hopefully, come into his prime over the next decade. Simultaneously, this chart makes me very worried as an American. The chart is of the yield on the 10 U.S. Treasury since 1962:

The trend is clear, and we all know how it has contributed to the United States very large budget deficits. The trend has been overwhelmingly driven by foreign (read: Chinese) demand for our debt. Its what dampened interest rates and created the housing boom. Yet for better or worse, this trend will be broken and a massive fall in Treasury prices will ensue. The stronger the trend line, the more painful the break will be. The sharp spike down in yields last winter was likely a case of capitulation in Treasury buying. We are now seeing a consolidation that we believe will lead to a significant breaking of the downtrend line over the next year. This will likely be in conjunction with the decline of the U.S. dollar and continued heavy Treasury supply (from healthcare, Afghanistan surge, etc). Foreign central banks are currently in the act of reducing their holdings of Treasury debt. The sustainability of this trend is discredited by the next two charts:


Note that the second chart, of future debt to GDP ratio, was created in 2007 before Obama was elected and the financial crisis set in. This graph is based solely on projections of federal entitlement spending. In the first graph note the steady increase in debt to GDP ratio over the previous 40 years.

If I was forced to put one position on today for the next 10 years, without question that one position would be short Treasuries. The trade of the next decade will not be short the dollar, long equities, or long China. Though all of these may be profitable for periods of time, the short Treasuries trade has yet to shake out and will have a far more massive impact than any of those mentioned above. It may mark the end of Empire America, but I'm about making money whether Rome survives or not.

Disclosure: Author owns a position in the ETF PST, which is a leveraged short of the 7 and 10 Year Treasuries