Timmothy Posey

Why I Feel TBT Is About to Become a Goldmine

TBT in itself is an armageddon trade. To get any real value out of it, Treasures (and the Dollar) have to drop considerably. It can happen in the following scenarios:

1. QE comes to an end as investors get the slightest whiff of inflation and sell out of Treasuries, and possibly into equities/TIPs

2. US loses their AAA rating.

3. We see a flood of other AA/AAA rated corporate debt issues. FedEx/McDonalds are already talking about their upcoming issues. We see a flight out of Treasuries and into these similarly rated and higher yielding corporate debt.

The author of this article is assuming #1 happens. That we eventually get reflation and we sell out of Treasuries. I think that is unlikely to happen anytime soon because of the Fed's wishes to continue QE "for some time" and to keep their ZIRP policy "for some time". They are willing to monetize any debt the Treasury issues.

#2 won't happen anytime soon because S&P said we should be in the clear until 2012. In any case, S&P should be shot for helping us get into this mess in the first place

I believe #3 will be more likely. There have been a lack of issues in the past 6 months, and that can only continue for a little while longer until there is pent-up demand for companies to refinance their debt. In the case of great companies like GE, Wal-Mart, McDonald's with great AA or higher ratings willing to give a great yield spread premium over what the Treasury is offering (pretty much 0 at this point). We could then see a flood of investors leaving Treasuries into something just as safe, but yielding more. This requires confidence, something Obama can give us for nearly free. This is also the true intended policy of the Fed (to encourage private investment rather than hoarding of money).

In either case, TBT would be a good play for all three scenarios.