Jasper M's  Instablog

    Not so long ago, I came upon a commenter here on SA who declared that 'T-bond trading is only for pros'.
    I have complex feelings about this statement. It has not been my experience - I've made money 4 times in as many years. But, from that same experience, I suspect it is passable advice. My experiences with T-bonds have been troublesome and nerve-wracking, and were only profitable because I had a lot of determination, and some of the best advice around.
   Starting in late 2006, I have had 4 positions in longer-maturity US Treasuries (or a tightly related ETF). Each time, I targeted shorter maturities. Each time, I didn't hold them as long. Each time, I made less total profit. All during a time when the very solvency of said Treasury has been in progressively greater question.
    I am going to spell out some of the details of my adventures in Treasuries here, so you can draw you own conclusions, as to difficulties, and arguably my own good sense.

     It all started back in late 2006. I wanted to try out a prediction by Robert Prechter, who had opined that the spread between AAA debt and junk would continue to widen. I agreed. So I bought an inverse junk bond fund, and bought a 30 year T-bond (^TYH). Small positions, 5 grand each. 
    This last proved more troublesome than I expected - my broker, really, Really didn't want me to buy that T-bond. But I am a stubborn person, and I got my bond. 
   I would like to stress that, at that point, I had every intention of holding that bond for a very long time.
     Both ends of that trade proved profitable. But as budget issues, and the likely consequences of the near certainty of a Democrat President, continued to loom, I got nervous over the big run-up in my bond. So I sold it. 9% capital gain, plus about a year's worth of 5% interest. 
    But then I realized my junk short was now unhedged, and the intermediate-term outlook for T-bonds seemed okay. So the next wiggle down in Treasuries, I bought TLT, an ETF holding Treasuries with 20+ years left to maturity. I figured this would provide a more fluid vehicle, should I want to get out sooner than later. 
 
   Several months later, I determined that my inverse junk fund position, while profitable, was not effectively mirroring the performance of the underlying issues. So I closed it. I closed the Treasury ETF hedge at about the same time. About 4%.

   As the run-up to the Lehman failure began, I began to lust after a short position in junk bonds again. This time, I planned to short a junk bond ETF. Preparatory to that, I established a hedge by taking a position in another iShares Treasury ETF, this one holding maturities of 10-20 years (as I was getting somewhat gunshy about the possibility of a big jump in rates) (sorry, no ticker symbol, I can never find it in a hurry when I need to).
    Joke was on me, as my broker could not 'locate' junk ETFs to short comparable to the size of my Treasury ETF position.  And then the Treasury chart started to look worrisome. But then, a few months later, Bernanke pulled out the QE bazooka, and blasted my position back into the black. Knowing that the effect of such interventions is seldom durable, I took the opportunity, and bailed out with a marginal profit.

   (Digression: I can't help but wonder if this is one of the ways investors get sucked into trading - they exit a bad position swiftly, with a small profit, then note the profit/unit time is reasonable)

    At that point, i thought I was done with all but the very shortest term Treasuries. Given all I had experienced so far, why take the risk, and why endure the bother?
   But ultimately, I am a technician, and I can forgive a lot of fundamental horror if the charts look promising. And in August, the Treasury chart started to hint at a possible intermediate term bottom. This seemed to correlate with anticipation of "flight to quality" buying of T-notes when the bear market in stocks resumed. I was flush with cash from a Very profitable 2008, so I determined to plow a good chunk of that into a position in the US 10 year Note. 
   Since I had every intention of holding the bond for a long time, I decided to skip the convenience of an ETF.
    Easier said than done. The world is awash in US Treasury paper . . . but there was none for me! Ended up buying an old 30-year bond, with 10 years left on it. Close enough.
    (digression: just to put things in perspective, note the original interest rate on That bond, issued in Aug of '89, was 8.125%) 
     Well, long story short, the "intermediate term" I envisioned apparently was a lot briefer than I supposed. As I said before, I can ignore fundamentals as long as the wave counts look good, but when they stop looking good, I get uncomfortable, fast. Longer Treasuries look like they're done, the "quality" that will be flown to will be something else, and I cannot expect much more there. I closed the position a few days ago, for what appears to be a fractional percent profit, after commissions and such. 

   I learned a lot from these trades, about bond trading, and a bit about myself as well. I leaned that bond charts are a lot harder to read than the Dow. And I learned that, while you can make a profit going long the bonds of a financial irresponsible entity . . . it might not be worth the hassle.