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Shying Away from US Treasury Bonds as a Vehicle for Risk Mitigation

|Includes: iShares 7-10 Year Treasury Bond ETF (IEF), SPY, TBT
There has never been a time when it was a simple feat to predict the course of US Treasury Bonds (in this article I am referring specifically to the 10-yr note). Today, with investors worried about which direction the global economy will take, it is no easier. Historically, and still most recently, the US Treasury Bonds Interest rate has moved in correlation with the market (we'll say the S&P 500 (SPY)). However, the market has reached an interesting point in the life cycle of Treasuries. The US debt has finally caught up, and many US and European investors are in denial about the default risk of the US (and the Eurozone) and continue to buy more Treasuries. As these global investors drive down the interest rate, other investors such as China and PIMCO, maintain an astoundingly bearish view on Treasuries.

Who is correct? It doesn't matter. The important thing to note is that there is a new force driving the Treasuries yield: default risk. Treasuries are now open to fire from short-sellers who are pessimistic about the US's ability to pay off its creditors. Ancient Lake Investments, which has used Treasuries to hedge private sector risk since inception, has officially liquidated all positions in US Treasuries. Because we at Ancient Lake do not feel that we have any edge in predicting the macroeconomic future of the US default risk, we have chosen not to speculate on US Treasury Bonds. We encourage investors looking to hedge private sector risk out of their portfolios to avoid securities such as iShares Barclays 7-10 Year Treasury Bond ETF (IEF), or even ProShares UltraShort 20+ Year Treasury ETF (TBT). Ancient Lake Investments considers any position in Treasuries at this point to be a form of speculation, and we have reallocated to other positions in order to hedge our risk.