Bond ETF Trading: Are US Bond Prices Over Extended? (TLT, TBT)
Monday’s trading session was quite uneventful and could barely distract me from watching my grass growing. The S&P 500 and Dow Jones indexes closed at a whopping 0.1% plus and minus respectively while the Nasdaq was up surged (relatively speaking) by 0.39%. Yawn.
Meanwhile long-term US bonds, tracked by the iShares Barclays 20+ Year Treasury Bond ETF (NYSE:TLT) gapped up at the open and closed 2.5% higher. Not a huge gain by equity standards, but pretty big for the bond market.
While I have been bearish on long-term bonds for some time now, Monday’s move is somewhat disconcerting at first glance. This is because a surge in bond prices is indicative of financial turmoil and normally occurs in sync with a drop in equities as investors seek safety.
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The absence of a drop in equities, coupled with bearish technicals leads me to believe that this knee-jerk jump in bond prices will quickly reverse and adds to my conviction for shorting bonds.
Here’s the chart:
iShares Barclays 20+ Year Treasury Bond ETF (NYSE:TLT)
iShares Barclays 20+ Year Treas. Bond ETF (NYSE:TLT)
We continue to see momentum divergences, but Monday’s move seems to be the straw that broke the camel’s back. Big jump on mostly average volume and no momentum. The MACD is trending downward (red line) and as with every great momentum ETF, the reversals can be very significant.
I fully expect a gap-fill from (NYSE:TLT) within the week and support at $98 needs to hold if this ETF is expected to keep up this run. I don’t see it happening. I see a break below $98 which exposes $94.70 and probably lower over the next few months.
Shorting (NYSE:TLT) or going long the inverse of (NYSE:TLT) which is (NYSE:TBT) is no get rich quick scheme, but I make a point to monitor long-term bonds because of the clues they give on the economy and overall health of the markets.
Some people believe that the United States is in for a Greece-like bond crisis as it faces similar deficit and debt problems, only on a much larger scale. Broke states are issuing IOUs and begging for federal aid. The debt-to-GDP ratio of the Greece is around 110%, compared with 98% for the United States.
The scary part is not the similarities in ratio, but rather the difference in size of their respecitve economies. With the United States economy being nearly 45 times that of little Greece, you can imagine what kind of effect a sovereign debt crisis would have on the world. Some people believe it is only a matter of time before a Euro-style meltdown in the US and other large economies.
While I am open to many different theories and fundamental analysis, I trade based on charts and never predict fundamental events. Betting on future fundamental events may as well be gambling unless you are a seasoned pro in that sector or asset class with a deep pockets and a whole lot of analysis on your side. I prefer to sit on the sidelines until the news is out and trade accordingly.
If you want to know whether I think the US will have a Euro-style debt crisis, all I can say is that it is highly possible. That’s only my opinion. What do you think?
When bonds flew to low yields in 2008 there was a massive crisis at hand. GE and other companies could not borrow overnight, banks would not trade with each other, and stocks were gapping lower…. in order to keep the world afloat, central banks increased purchases of bonds and cut rates….. but this is 2010. The panic has subsided, and one need to focus on how central banks will unwind this massive stimulus.