I am throwing in the towel on the (NYSEARCA:TBT) ETF, my 200% leveraged bet that Treasury bonds will fall. I am doing this partly to clear out the dogs from my portfolio so I can start the New Year with a 100% cash position. But I am also bailing because the short term fundamentals point to continued weakness in the economy, a flight to safety, deflation, and falling interest rates for long term Treasury bonds.
The dagger through the heart of this trade was the Federal Reserve’s “twist” policy implemented in September, whereby, it bought hundreds of billions of dollars of long term bonds and sold short dated ones. I have been trying to get out ever since. But the (TBT) managed a feeble rally from $18 up to only $23, despite a huge “RISK ON” trade that took the S&P 500 up a whopping 200 points.
This morning, the 30 year Treasury bond auction saw overwhelming demand, the bid to cover ratio hitting a stunning 11 year high. With the outlook for financial markets next year so uncertain, the demand for “risk free” paper knows no bounds. Investors are happy to take a negative real yield for 30 years if they believe that other alternatives offer bigger potential loses.
Besides, people want to run with what’s working, both individuals and institutions.
Sure, this is insane, but after 40 years in the business, you learn that people can be insane for a really long time.
If we go into a recession next year, or even just threaten one, a 1.50% yield on the ten year Treasury is a chip shot, and it could even go as low as 1%. With that prospect looming, I don’t want to hang on to the (TBT) in the hope of cutting my losses by few points at the risk of losing many more. I really should have stopped out of this position over the summer when it broke my 10% stop loss limit. Whenever I break my own rules, it always costs me money. But for those of us who have been at this game a long time, seeing the ten year with a 1% handle is truly unbelievable.
Getting out at this level has cost my model $100,000 virtual portfolio $7,080, or 7.08%. I made far more back by hedging my (TBT) losses with gains in short positions in the Euro (NYSEARCA:FXE), the Swiss franc (NYSEARCA:FXF), the S&P 500 (NYSEARCA:SPY), and the Russell 2000 (NYSEARCA:IWM); so on a net basis, I am still way ahead of the game. That’s why they call this a “hedge” fund. That reduces my year to date return down to 40.18%, something I’ll just have to live with. It’s better than a poke in the eye with a sharp stick.