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Inflationary pressures likely to put brake on any Treasury rally

|Includes: iShares 20+ Year Treasury Bond ETF (TLT)

Tim Biggam, TradingBlock  (November 08, 2011, 3:40pm CDT)

Symbol Analyst Target Price Target Date
TLT 110.00 March 16, 2012

The iShares Lehman 20+ Year Bond ETF (ticker: TLT) seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Barclays Capital U.S. 20+ Year Treasury Bond Index .

The fund generally invests at least 90% of its assets in the bonds of the index and at least 95% of its assets in U.S. government bonds. The underlying index includes all publicly-issued U.S. Treasury securities that have a remaining maturity of greater than or equal to 20 years, are rated investment grade, and have $250 million or more of outstanding face value.

TLT is a way for traders to play the long end of the Treasury curve in a securities account. While the Fed has been the buyer of nearly all the longer-dated Treasuries since Operation Twist was announced in September, longer-term rates have actually crept higher since that time. TLT moved up to 124 at the time of the Operation Twist announcement, only to fall back to the present level around 117 today.

Given the unrelenting money printing now going on both here and overseas, inflation will most likely continue to creep higher, putting a strong headwind in a further rally in longer-term Treasuries.

Technically, TLT has a gap to fill at the 110 level, which was the early September break-out level when rumors of Operation Twist began to rumble in earnest. I look for TLT to head back to the 110 level by March 2012 expiration. 

Play of the Day

 Based on the iShares Lehman 20+ Year Bond ETF's (ticker: TLT) current market price of $115.72 and using a target price of $110.00, a target date of March 16, 2012 and $10,000 of investment capital, below are three options strategies (ranked by potential profit) and a comparative stock trade to consider should the price target be achieved at the target date.

Click on the strategy name below to access trade details using TradeBuilder on Powered by TradingBlock's TradeBuilder.

Strategy (click for details) % Return at Target Probability of breaking
even or better
Sell Mar Iron Condor +222% 42%
Buy Jun Call Butterfly +147% 60%
Buy Jun Call Condor +78% 65%
Sell Stock +5% 44%

* Click link to access TradeBuilder details on Must have Instant or Actual account. Subject to change due to changing market conditions.  Click here to view risks regarding selling stock short.

DISCLAIMER: This content is provided for educational and informational purposes only. Evaluate any strategy prior to use to understand risk and suitability. TradingBlock does not endorse or warrant any Market Analyst content, service or product. Use this content at your own risk without guarantee or warranty of any kind from TradingBlock. Tim Biggam is a TradingBlock registered representative. He is not compensated by TradingBlock for any market research or analysis services.