Here is a quick primer on the current Treasury market.
1) Sell short term bonds. They are at historic lows. But more significantly, they truly can't fall much farther. 3 month Treasuries are currently at 0.1% while they have historically averaged 3.46% over the past 20 years and 4.23% over the past 20 years excluding the recent financial turmoil. The US Treasury will not let interest rates turn negative given all the parallels that have been made between the US economic downturn and Japan's meltdown during the early 1990s. Operation Twist illustrates this and will begin to move short term interest rates up over the short term before longer run economic factors come into play. I believe that this is an asymmetrical bet in that the downside is small, and the likelihood of a yield increase is greater than that of an increase on the short end. Shorting Treasuries can be a difficult trade for the individual investor. The real way to play this trade would be through selling swaps and taking the floating rate; this is generally only done on the institutional level. However, there are other ways to gain exposure to this, namely through the equity market.
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2) Yields in general are at historic lows. Every single Treasury is yielding lower rates than at any point in the past 20 years. I think it is only a matter of time before officials wake up to the dangers of such low interest rates on products such as pension funds etc. David Einhorn wrote a great article on this idea. In general I would not touch Treasuries at all. Incredibly low rates. Real interest rates on 30 year bonds are less than 0.5%. After taking out any capital gains you basically are earning next to nothing. Additionally, with all the money going into the system, I think there is a higher probability of inflation increasing than decreasing. This should also force long term interest rates up in the future. This could be great for insurance companies who have to invest often time in the bond market and right now are getting quite low rates of return. This could also benefit companies with large gaps in their pension funds, as rising interest rates will help them make up for lost ground. As an individual investor, I would be wary of Treasuries with long duration as these are the most sensitive to changes in interest rates.
3) Operation Twist hasn't had a ton of effect. This move by the Fed was designed to flatten the yield curve by selling short term interest securities and buying long term ones. In spite of public proclamations of more easing, the 30 year rate has only moved down slightly since October 2011. Short term interest rates have gone up some but that could also be attributed to the fact that short term rates couldn't go much lower. Not that the fed is unimportant, but I think that its interventions are clearly having less and less effects on the markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
