Placing Bets on Today's Treasury Auction

 |  Includes: TBT, TMV
by: Alex Cook

Today’s 10-Year Auction is going to be a very important indicator for how healthy the US credit market is and how well the US government can finance its growing national debt. The recent 5-Year Auction went over poorly. Today will be a more important sign, as the 10-Year T-Note is the benchmark of reference.

As I have written before, I am bearish on Treasuries. To be clear, I am not suggesting an extreme scenario like a Greek-style national debt crisis, but I do think that Treasury demand is going to decline with a growing total debt outstanding, growing deficits, and uncertainty about the US dollar.

We will not know for certain until the auction actually happens. The way to play this (and the 30-Year Auction on Thursday) from a bearish angle is the TBT fund, or TMV if you want to be more aggressive. I like those funds in particular because of how they target longer-term Treasuries, which I believe have more room to swing, since the government will likely be able monetize the debt in the short term but must suffer inflation in the long term.

Another strategy is to buy out-of-the-money puts on Treasuries that will likely become in-the-money if Treasuries fall in value, but since this strategy is more aggressive and requires picking the right strike price, I only recommend it for advanced investors.

Be sure to watch this story today as this unfolds, and also be sure to watch the 30-Year Auction on Thursday.

Disclosure: No positions