This page has been archived and commenting is disabled.
The Fat Lady is Still Singing in the Treasury Market
To say that things have gone well for the Treasury bond market this year would be one of the understatements of the century. First there was a global flight to safety triggered by the European debt crisis. Then there was the mad rush by hedge funds to cover shorts in securities they believed were the world’s most overpriced assets. Then Ben Bernanke appeared on the scene with QEII, sending bond prices everywhere to 50 year highs.
Every academic study showing that government paper had 30 years of underperformance ahead of them, including my own, only seemed to drive prices higher (click here for “A Visit to the Insane Asylum” at http://www.madhedgefundtrader.com/october-6-2010.html ).
In fact, my report on “The Great Bond Market Crash of 2010” lagged the actual peak in bond prices by just five days (click here for the piece at http://www.madhedgefundtrader.com/august-30-2010.html). At the August high, the Treasury market was effectively discounting 0% inflation for ten years, an insanity I was happy to bet against.
The recent action in the markets suggests that the big turn may finally be behind us. Why have bond prices been falling for the past month, despite an assumed promise by the Fed to provide unlimited amounts of liquidity? Why has a ton of Chinese and other foreign buyers failed to set a new high. Is it possible that the fat lady is at last singing in the Treasury bond market?
Let’s say we get a “RISK OFF” reversal in global financial markets. The short Treasury Bond ETF (TBT) bottomed at $30 at the end of August and has made it back up to $35. Take it back to this year’s high of $52 and that gives you a 49% gain off the bottom. The 2009 high gets you to $60, an even 71% return. If you don’t feel like betting the ranch here and want to approach this in a sober, risk controlled manner, look at the cheap, out-of-the-money March or June, 2011 $45 calls on the (TBT). Get this one right and the profit will be several fold.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
- advertisements -
Message
To: madhedgefundtrader
From: Doug Kass
Get out of TBT today. Tomorrow the Fed fades us big...
Query whether Dodd-Frank will prop up the bond market. New rules for derivatives will require positions to be collateralized at 100% plus initial margin at the clearinghouse. In the past, parties were free to negotiate the amount of collateral held, with less credit risk equating to less -- sometimes no -- collateral. This change is going to result in a huge surge in the amount of collateral that market participants must post, and I presume that the lion's share of the collateral to be posted is treasuries.
I think the big threat to this thesis is the Health Plan and goes a long way towards explaining why treasuries had such a stellar recovery this summer and fall. That plan has the ability to raise 100's of billions in revenue for what at best is a very nebulous "benefit." It IS the law of the land so while it is in the interest of Republicans to seek repeal it is also in their interest to fail if they are serious about wanting to take over the other two branches of government. The Democrats are in a tough spot here because "it's their Prez who needs to announce the budget cuts" not the "opposition." That also is a net positive for treasuries going forward as "the buzz saw set" has political momentum. The negatives as presented here however are just as large--not the least of which is we have a "general breakdown of law and order." I'm a big believer that the Wall Street banks are basically "disintermediating the Federal Government" not through any policy of their's per se but because of a unique set of events that began with TARP, the auto bailout, QE 1 and 2 and needless to say "The War." EVERYONE OF THESE POLICIES IS UNPRECEDENTED and taken together needless to say has placed an unprecedented demand on what is a wholely incompetent and almost hilariously weak "central government." Outside of General Petraeus and the men and women under his command the only thing the Federal Government is capable of doing is cutting checks. The repurcussions of this reality (witness the auto bailout--it was the government that got downsized by doing nothing with this amazing asset and now is simply "gifting it" to Wall Street) are overall not good. I think it will lead to a disorderly collapse of state finances as the "transfer payments" dry up by all ending up in the Banks "where they sit." In short "what's the point of having a Union anymore"? I find every physical vestige of the Federal Government save for military reservations, the CIA and HHS simply irrelevant right now. That would include departments of energy, education, labor, NASA, the USPS, Fannie, Freddie, the department of Justice including the entire court system, the FBI, the Fed and most importantly the IRS on the cusp of being "thrown into the dustbin of history." The marker for me will be the absolutlely MASSIVE real estate market around the Greater DC metro area. Should the "zeros get lopped off" on valuations in this physical area you will see a diaspora of the likes never before seen in American history. Picture the city of Pagan, Burma "on a biblical scale."
There's so little supply in the 30 year,
Brian Sack can bash your skull in the
blink of an eye, so no thanks. Surprised
he hasn't done it already.
Congratulations – Your ship has finally come in with TBT following your often repeated forecasts to surge during 2010.
While it appears that good things come to those who wait (in the financial blogging/entertainment arena?), ZH readers who are actually trading ought to know that you have been flogging this puppy since early 2010. I would encourage them to visit your website and review your TBT posts in their full glory.
Here is a January 2010 sample.
2010 Asset Allocation Review
January 4, 2010
3) Bonds (TBT), (JNK), (PHB), (HYG)
Shorting the world’s most overvalued asset has got to be the big trade for 2010. I’m talking about 30 year US Treasury bonds. The relentless whirring of the printing presses is so loud that they keep me awake at night, even though, according to Mapquest, I live 2,804.08 miles away. What will be unique with this meltdown is that it will be the first collapse of a bond market in history in a deflationary environment. It is not inflationary fears that will execute the coup de grace for the long bond, it will be the sheer volume of issuance. The Feds have to sell nearly $2 trillion of debt to cover a massive budget deficit and to refund maturing paper, easily the largest amount in history. Pile on top of that billions more in offerings from states and municipalities bleeding white. By end 2010 total government debt will rocket to a staggering 350% of GDP. At some point, the world runs out of buyers, and the long bond yields will begin their inexorable climb from the current 4.6% to 5.5%, 6%, or higher. Even Moody’s is talking about a ratings downgrade for the US debt, not that we should give that disgraced institution any credibility whatsoever. It’s just a question of how many sticks it takes to break a camel’s back. I am a worshipper of the TBT, a 200% leveraged bet that long bonds are going down. It has clawed its way back up from $43 to $51, and $60 looks like a chip shot for the first half. Longer term this ETF could hit $200. If interest rates double from the current levels, a virtual certainty, so does America’s debt service, from the current 11% to 22% of the budget. That’s when the sushi really hits the fan.
ereHer
I don't think bonds will fall. Servicing the debt would become impossible, and house prices would collapse more rapidly than they already are. I think the Fed would see the above two as more important than saving the stock "market." An engineered collapse of the stock market would buy some more time in Treasuries.
Um, QE2 doesn't start until tomorrow. How can something be a failure before it starts?
The NewYork Fed has posted potential buying up to $119.5 billion of US bonds in less than 30 days. I don't want to fight that.
It will premature to discuss a bond market turning at least until then.
Getting back to fundamentals. After swinging and missing by calling a profit taking top in SLV and saying the FXY is about to burst, decided to try a bunt by stating that treasuries are overvalued.
Captain Obvious, you are cleared for runway 070, crosswinds 30 kts.
Mad Hedge Fund Trader is an idiot. He has been pounding the table on the TBT all the way down. If you had listened to his sure thing call, you would be living in a cardboard box.
I would pay good money to never, ever hear or read another thing from this jackass.