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Anticipating the Inevitable:

|Includes: ProShares UltraShort 20+ Year Treasury ETF (TBT), TMV

Come March 2010, the U.S. Federal Reserve will be faced with the dilemma over whether it will follow through with its planned action and discontinue the purchasing of Agency and Agency Mortgage Backed Securities.  A lot of speculation has been raised over whether the Federal Reserve will follow through with its schedule, or extend the purchasing and continue providing a crutch to the housing industry.  Many media pundits have expressed contrasting views citing “The Federal Reserve should extend the purchasing program given the fact that the U.S. economy is not strong enough to stand on its own two feet” and “It would not be considered prudent fiscal policy to continue the purchasing program”.

As we have mentioned before here at, we believe that the Federal Reserve will indeed discontinue the purchasing of Agency and Agency Mortgage Backed Securities.  Recent Federal Reserve statements have reflected optimistic outlooks on the pulse of the U.S. economy.  Even in recent minutes from the Federal Reserve’s December Meeting mirror the notion that the Federal Reserve intends to stay the course, unless a sizable situation arises that would change the current economic direction.

In the coming week, the Federal Reserve will be issuing nearly $100 billion of Treasury Securities.  The schedule is as follows:

- Tuesday, January 12, 2010: $40 billion in 3yr notes & $26 billion in 52wk T-bills

- Wednesday, January 13, 2010: $21 billion in 10yr notes

- Thursday, January 14, 2010: $13 billion in 30yr bonds

We will be closely monitoring the action in the 30yr bond issuance, as that is where we believe the greatest supply/demand imbalance exists.  Any sign of week demand in any of this weeks Treasury auctions will provide a bearish catalyst sending government bond prices lower and interest rates higher.  To capitalize on this imbalance, we recommend the ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT), and the Direxion Daily 30 Year Treasury 3x Bear (NYSEARCA:TMV).

Disclosure: Long TBT, TMV