Lou Thomas

Time To Short Treasuries?

Come to think of it, if the Fed decides to monetize the debt by buying Treasuries itself (and specifically, through printing money) then couldn't that keep treasury yields artificially low (ruining your shorting strategy) while at the same time debasing the U.S. currency?

It may be that there are so many ways to stack the deck and fix the game domestically if you are the Fed that the only point at which reality will eventually come to bear (no pun intended) is in foreign exchange.

Time To Short Treasuries?

I don't know what will happen, and don't have a good grasp of the treasuries market, but here are some random thoughts:

I think that Roubini and others at RGE have said (check me on this) that the dollar will probably continue to rise vs. all but the yen during the first half of 2009 due to forced repatriation of dollars via deleveraging. That implies he does not think that the market is going up in that interval, right?

Where will this money go, if not treasuries?

Conversely, at the point that these flows diminish, one would think that treasury yields would have to rise to attract further foreign investment. However, at just that point, the dollar might begin to fall vs. other currencies, because the forced repatriation from deleveraging would be diminishing. This could indeed cause a cycle of extreme treasury interest rate increases, as foreign money would be even more difficult to find with the dollar tanking, and yet the need for such money to finance huge deficits from stimulus (and continuing trade deficits) would be increasing.

So, I do believe that treasuries are a bubble that will eventually collapse. But it occurs to me that the dollar may decline just as treasury values are tanking, and since funds that short treasuries such as TBT are in the dollar, you'd end up earning dollars just as the dollar was going down vs. other currencies. In other words, going short treasuries requires continuing to own the dollar, which may tank at the same time that treasuries do.

So, perhaps a better idea would be to go into the Euro at the point that deleveraging flows cease to support the dollar? It could be down pretty low by then - some think as low as $1.10.

If this is correct, then it comes down to a quantitative analysis regarding the extent of treasury decline vs. the extent of dollar decline. I am certainly not prepared to even speculate regarding such quantitative tradeoffs. But can anyone see a scenario in which treasury interest rates must rise but the dollar does not tank vs. other currencies?

Well, that's the general notion. Any thoughts?