I'd like to talk about bonds but this market is completely out of the hands of supply /demand - the Federal Reserve has made this their plaything. But the market has started to make the Fed unhappy and prices are faltering, causing yields to begin to rise. The all important 3% on the long bond is the line in the sand - each time we get there Bazooka Ben says no more! We can't have mortgage rates go to "unnatural" levels like say ... 5.4%. So I'd expect trench warfare to be announced Wednesday to get this to "bend" to the will of the Federal Reserve. Because that is how central planning works.
If I knew the Federal Reserve were not involved, I would be piling into this short hand over fist, but we now have to learn to trade under the USSA regime. On the chart below you can see the huge reaction 6 weeks ago when Uncle Ben announced quantitative easing; I want to avoid that in case he comes with a bigger bazooka tomorrow - so I am going to lock in my gains in the $99s - I'll keep 5 shares around just as a holding position.
This is not a fast money trade - but this will be a position we'll be holding for years as our belief is the massive amount of debt the US is unloading upon the world will require higher and higher rates. But that's logic, and supply/demand - things that used to work in the market. Now we need to compensate for the other factor: The Not so Invisible Hand. What "it" does is unknoweable. We've been shorting around $104 and covering around $101s in multiple iterations - slow, boring but it's been working. Now we've firmly broken out of the "range" as noted this past weekend.Ironically, I've chosen the much more conservative route of shorting iShares Barclays 20+ Year Treasury Bond, rather than being long Ultrashort Lehman 20+ Year Treasury (TBT) which was a position we held in the old tracking account (that did not allow shorting). I haven't done a study to see how this Ultrashort does in terms of losing performance over longer periods of time, like all the other Ultrashorts do - but one day when I find time I need to sit down and do it.
If you are newer to the blog and want further details on the longer thinking behind this see [Nov 21, 2008: Bookkeeping: Initiating Ultrashort Lehman 20+ Year Treasury]
Short iShares Barclays 20+ Year Treasury Bond in fund; no personal position
4 comments:
This puppy (TLT) is breaking down and should have broken down a long time ago. But really all it has done is fill the gap from 11/19/08. I understand your concern with the Fed meeting in front of us; this is a manipulated market but who would have ever thought the old adage "Don't Fight The Fed" would be applicable to bonds. I have been long TBT for ever it seems like even suffering through the first quantitative easing. I think the break out (today) sticks but honestly this is just a hunch. I don't trade 'em the way you do so I may have to sit through another down draft
I agree
TLT should be far lower
but you saw 6 weeks ago what they did, something that moves slowly raced almost 8% in minutes. We now have to trade in the 4th dimension instead of 3.... the 4th being the invisible hand who doesn't even bother to be invisible anymore.
I also think the breakout COULD stick but I don't want to give away gains, I can always add to the position if this is the beginning of a new move.
i think the erosion of value wrt ultra short etfs is directly related to the volatility of the underlying... more volatile the underlying .. more erosion takes places in the ultra short/long etfs...
therefore i think the tlt/tbt pair are relatively safer compared to skf/uyg etfs
I have been selling OTM calls against my long TBT to cancel the decay.
Slow gain 12% in the past 3 months, but gain never the less and good long term prospects.
I'm a bit concerned about the Fed stop selling the 30 years bonds, which would push up TLT and down TBT, but we'll see...
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