A Second Opportunity For TBT

I posted once before about TBT and now again, TBT seems to be presenting an opportunity. The TBT is an exchange-traded fund (ETF) that creates a short position in the long-term US Treasury bond. Today TBT appears to have broken out above a long-term down trend-line and triangle pattern. From a technical standpoint this is bullish. From a fundamental view, interest rates are at historically low levels. A simple mean-reversion would suggest that rates will go up and bond prices will go down and the TBT will go up. Beyond mean-reversion, there are strong reasons to suspect that Treasuries will drop. First, the US government has been buying Treasuries to keep rates low to help the housing market and the economy. Once the government stops supporting the bond market, rates will rise. Second, so many investors are still scared of another collapse like the one we saw in the fall of 2008. These investors have kept their money in US government bonds. If the fears subside, these investors will sell the government bonds and buy other riskier assets. Lastly, the high US trade and budget deficits should, over the long-run, cause rates to rise. Today, the 10-year treasury auction did no t go all that smoothly. Perhaps we are beginning to see a change in the interest rate environment. It may be early but the technicals seem to be aligning with the fundamentals in TBT.

Time to get back into TBT

TBT, the UltraShort 20+ Lehman Treasury ETF, pulled back to the bottom of a well-defined channel and looks to have held support. TBT closed Friday at $53.56. The top of the channel is around $63. I think that the bearish case for US Treasuries is compelling not only from the technical perspective (that it held a support trend-line - remember this is a Short ETF) but from a fundamental, macro-economic view as well. In both the bullish case and the bearish case for the economy, US Treasuries are like to decline in price. If the economy recovers, money should flow away from the Treasury market and into riskier assets such as stocks and corporate bonds. If the US economy falters and worries of high deficits erode confidence in the US as a "safe-haven" and "reserve" economy, investors are likely to sell Treasuries. TBT looks like a good trade with a stop at $48 and a target fro profit-taking around $63. With TBT about $53.50, that gives you a risk-return profile of 5.5 points on the downside and 9.5 points on the upside almost a 2 to 1 ratio.

TBT - A way to play a possible outflow from US Treasuries

The TBT is the Ultra Short Lehman 20+ Year US Treasury Exchange Traded Fund. This security moves opposite the US Treasuries (price). There has been a massive inflow of capital into the US Treasury market. Driving this is investor fear, currency turmoil abroad and deflationary expectations. Currently, yields on US Treasuries are at almost all-time lows. The lows were hit recently during the panic environment of the 4th quarter 2008. There is a strong argument to be made that US Treasuries are incredibly overvalued/over-bought. As investor fear subside and as investors will one day regain their appetite for risk, the US Treasury market will decline. An eventual decline in US Treasuries could also be caused by worries over the US budget and trade deficits.

TBT appears to be in an uptrend. During February, TBT has been consolidating into a downward flag pattern. These patterns typically resolve by following the primary trend. A break-out above the flag pattern would indicate a "buy". A breakdown below the primary trendline would indicate a sell. If TBT breaks to upside, the target range would likely be a test and fill of the "gap created in November 2008.


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The commentary in this site is not a recommendation to buy and/or sell any security. This is for information and educational purposes only. Please consult your personal financial advisor and understand the risks when you invest.