Treasuries Rally on S&P Downgrade, Time to Add to Short Position?

Apr.18.11 | About: iShares 20+ (TLT)

A common perspective among those who are bullish on the precious metals market over a multi-year period is that long-dated U.S. Treasury bonds will shape up to be an excellent short opportunity. The two trades go hand in hand: Concerns with public (aka national) debt often lead to a flight into metals, and concern about national debt also send the price of bonds down.

In light of the recent downgrade by the S&P of U.S. credit, as well as the decision on the part of the U.S. Congress to raise the debt ceiling, the case for shorting the long-dated U.S. Treasury bond market may be returning. However, bonds have rallied since the downgrade, and many believe the downgrade is actually good for the bond market.

Personally I believe the case for a fall in 20+ year Treasury bonds is strong and growing, and will be looking for corresponding opportunities accordingly. Below is a weekly chart of TLT, an ETF that tracks the 20-plus year Treasury market. We see a key downward trendline has been broken, which may put the bears on hold. Personally, I think we may be in for a rangebound period, where short positions are being quietly accumulated. This is the kind of scenario where I will be looking to short from the top of the range or any type of resistance level (94 currently looks like a nice price point in my opinion to short from), in hopes of catching a big move down. We see a key low at 88.32 that has been tested three times already. I think this will give way soon, in light of the repeated tests and the strengthening fundamental factors.

Click to enlarge

Click to enlarge

Disclosure: I am short TLT.