Selling Spurt Takes 10 Year Treasury Yield To Fresh Two Year High

Recall my tweet on June 3 on 10-year treasury yields spiking, inferring the Fed was losing control of the long end of the yield curve.  I was right, and the TBT long trade has been profitable.

http://www.zerohedge.com/news/2013-08-16/selling-spurt-take-10-year-treasury-yield-fresh-two-year-high

Gold soars, equities tank

My long precious metals / short equities play has worked beautifully.  The question is what will happen going forward, debt ceiling debates notwithstanding.  I have no idea what stocks will do, because if the USDollar plummets, and equity markets could meltup in nominal terms, investors could still lose in real terms, due to currency devaluation.  A sharp decline in equities could also give reason for the Fed to re-deploy QE.  Further easing could cause equities to rebound as a result.

Short-term, bond prices are rallying in a flight to quality.  Long-term, I view this as a huge mistake, as interest rates can't stay at these depressed (manipulated) levels forever--and US Treasuries are no longer "riskless" safe havens.   Of course, Japan has defied this logic for 21 years and counting, so one can never tell.  As Keynes once said:  ""Markets can remain irrational far longer than you or I can remain solvent."

Precious metals remain in a decade-long secular bull market, for reasons I've blogged about ad nauseum.  The bottom line is that a debt ceiling hike changes nothing with our structurally broken economy.  We still have a compounding debt problem, and raising the debt limit exacerbates the problem, even if it delays the end game.  The G-8 countries are overly indebted (with Germany the lone exception, however their banks have exposure to bankrupt sovereigns), and the competitive currency devaluation continues.  There will be no winners in this race to the bottom.

Be right, and sit tight.  I ignore claims of precious metals being in a bubble.  I let the weak hands exit for a "profit" and I buy the dips when precious metals correct.

See disclaimers in the side bar.

Disclosure:  long precious metals, and mining shares.  Opened a long position in TBT today, a double-short on 20+ Year US Treasury bonds.  Long DXD, a double-short on the Dow Jones Industrials Average.

Taleb is shorting US Treasury bonds

Nassim Taleb, author of "The Black Swan", who predicted the credit bubble and financial crisis in 2007, says the US Treasury bond market is the next to burst. I couldn't agree more, and have been blogging about this for over a year. Who in their right mind would lend money to a broke US government, tying their money up for 30 years, while earning less than 5% interest for the privilege of taking on that risk?

http://www.bloomberg.com/apps/news?pid=20601087&sid=a3E4uC5VIFeo&pos=5

While it's not convenient or prudent for retail investors short US Treasuries in the futures market, the TBT ETF is a possible trade on rising long-dated bond yields. But TBT is not an efficient proxy for shorting Treasury bonds, and tends to underperform in the long-term.

However, home borrowers should lock in a low fixed-rate mortgage to protect themselves from rising yields in the 10-year Treasury bond.

See sidebar for disclaimers.

Disclosure: no position in TBT.

Bubble in Treasury bond market?

Although the TBT exchange-traded fund (ETF) is not an efficient proxy for rising long-dated US Treasury bond yields, it is one of few investment vehicles available to retail investors.

http://moneynews.com/Headline/Experts-GetOut-Bonds-Bubble/2009/12/31/id/345127

TBT is a leveraged bet against the long Treasury ETF iShares Barclays 20+ Year Treasury Bond (TLT). It attempts to double the inverse of the returns of TLT, using options and futures contracts. Theoretically, if TLT rises 1%, TBT should decline 2%. Likewise, if TLT declines 1%, TBT should rise 2%. In essence, if 20+ Year Treasury Bond yields rise by a certain amount, the price of TBT should rise twice that amount.

The reason why TBT underperforms its intended goal of achieving these returns is due to performance drag from the derivative contracts of the UltraShort fund being rebalanced every day. This causes isotopic decay, so the ETF never reaches previous highs--even if the directional bet is correct.

The best way to profit from rising yields in long-dated US Treasury bonds it to short sell them in the futures market, which is unfeasible for most retail investors, due to volatility risk and excessive leverage.

In summary, the TBT ETF trade will be profitable short- and mid-term if long-dated bond yields increase, but it won't be as profitable as expected long-term. Of course, the best way to protect yourself from rising interest rates is to lock in historically low interest rates with a fixed-rate mortgage.

Disclosure: long TBT shares.

Taking profits

And in these skittish markets, I'm not ashamed. Took some profits on TBT, up 50% due to rising 30-year T-bond rates (TBT is a double short ETF betting on rising bond yields and declining bond prices). It gapped up today and could break out, so I kept some on the table. But with a 50% profit, I had to take some off the table. If the Fed goes through with quantitative easing and monetizes that debt, they could temporarily drive bond prices up and yields down. Long-term, I'm still bearish Treasury bonds, so I will wait for another good entry point to buy TBT. But with volatile markets, you take your winners and cut your losers. Buy and hold won't work going forward (it didn't work in the last decade either).

Also, I cashed out partial positions in a uranium stock (up 25%), and of course DNDN this morning for a better than 300% pop. Notice I said "partial", as I am merely taking some profits, but letting the house money ride. Most professional traders average in their buys, and average out their sells, because no one can buy at the absolute bottom or sell at the absolute top. Don't blow your wad with one initial big trade. And don't get discouraged if the price drops a little as soon as you buy, or goes up a little when you sell. Knowing when to sell is as important as knowing when to buy.

The reflation play is still intact, and I will be looking to buy into dips on hard assets (commodities, precious metals, energy). We are in the throes of a bear market rally, but I certainly don't want to stand in the way of stampeding longs. When I hear talk of the beginning of a new bull market, I'll know this rally would have been a head fake, at which point I will buy some appropriate puts. If I miss the big decline--oh well. NOT losing money in this market is like a win.

I also want to get liquid and keep my powder dry, as another biotech opportunity is presenting itself. This may not be another DNDN blockbuster, but FDA approval seems imminent. Stay tuned.