RiskReturnOptimizer's  Instablog

Equity prices (+25% in 4 weeks) have priced in much better economic environment and corporate default expectation than corporate bond market. Meanwhile, quantitative easing and unwinding of "fear trade" are finally leading to increase in treasury yield.  I'm using the following three-leg trade:  long TBT, long LQD, and long SDS (short SPY).  My reasoning is that one of three scenarios is likely to happen:

1.  Fed is successful in reflating the economy and business environment does improve -- higher interest rates and lower credit spread will benefit TBT and LQD; SDS might suffer.

2. Credit spread remains high despite Fed's efforts and deflation continues -- SDS will benefit as current equity prices have priced in improved economy and corporate earnings; TBT and LQD will suffer.