Monday, January 05, 2009

Chart of the Day: Big Reversal in Bonds

After months of heavy buying in Treasury bonds, driving yields down to record lows, the last couple of days has seen a pickup in selling. (When bond prices fall, yields rise, and vice versa)

I noted a couple of weeks ago that I felt the stampede into Treasurys was overdone, and I was looking to short bonds. My vehicle for implementing this trade was to buy the ProShares Ultrashort Treasury ETF (TBT). This fund moves inversely with long-dated bond prices.

I was a little early in putting this trade on, but a look at the chart above tells me my thesis is starting to take hold. Notice the huge volume spike accompanying today's action, signaling strong conviction. Also, after reaching deeply oversold territory, the RSI indicator (top) is turning higher.

With all of the money that the Fed and other central banks are printing in an attempt to reflate the global economy, long Treasuries will likely reflect at least some pickup in inflation at some point.

But the Fed is also buying long-dated assets, and trying to do everything possible to keep rates low to help stimulate the economy. That, along with near-term fears about inflation, are what make this trade tenuous in the short-term.

As such, I will likely trade around this position, but for now I am willing to see how far today's strong bounce can carry it.

long TBT


At 6:25 PM, Blogger Ariel said...

I'm using TBT too, but took partial profits at the 200 hourly moving average, and looking to determine whether we see just a second wave pullback up in T-bond prices, or a finishing rally peak to slightly higher new highs meeting a long-term Fibonacci target. Either way, I agree that the high of our lifetimes in US treasury bonds is either completed, or very close. (If TLT falls under 109 that's probably confirmation the top is in, IMO.)


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