Jeff Nielson: The U.S. Treasuries market is currently the dominant financial mystery of the present time. Much like the proverbial “lead zeppelin” defies the laws of physics, the current status of the U.S. Treasuries market defies all of our financial fundamentals. Read more…
Making money in bonds when the dollar is tanking … when deficit spending is surging … when interest rates are rocketing … and when the U.S. government’s AAA credit rating is openly being questioned … sounds darn near impossible. And it is if you spend all your time focused on U.S. bonds.
But this unique combination of forces also opens up specific profit opportunities in one corner of the bond market — FOREIGN debt.
In fact, one of my favorite foreign bond mutual funds has gained more than 4.5 percent in the past month. Compare that to something like the iShares Barclays 20+ Year Treasury Bond Fund (TLT), which has plunged 22 percent in 2009 alone! Read more…
How long can an investor earn 0% on their money? The days of moving your money to a safe haven environment can’t last for ever. Treasuries will be the next bubble to burst as investors seek to make their money work! I am reccommeding this ETF because I believe treasuries have nothing to do but reverse course, and TBT will be a good bet. The investment TBT seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Lehman Brothers 20+ Year U.S. Treasury index. The fund normally invests at least 80% of assets to investments that, in combination, have economic characteristics that are inverse to those of the index. It also typically invests in taking positions in financial instruments, including derivatives that should have similar daily return characteristics as twice the inverse of the index. The fund is non diversified.
What does one make of an investment that is down 40% in 12 weeks, yet has unquenchable investor interest? The ETF in question averaged less than 500,000 shares traded in September 08, but is currently averaging about 2,000,000 in December 08?
Say “Hello” to the ProShares Ultra-Short 20+ Treasury Fund (TBT). This exchange-traded fund seeks twice the inverse of the daily performance of the Lehman Brothers 20+ Year U.S. Treasury index.
Since longer-term treasury bonds have gained more than 20% over the last 3 months of the credit crisis, TBT has been cremated. Even 3 months ago, pundits surmised that the 30-year U.S treasury bond yielding 4.5% was undesirable… yet the bonds rose precipitously as the yields dropped from 4.5% to 4% to 3.5% to 3% to 2.5%.
Yields could drop lower… sure. And that would mean more losses for those investing in ProShares Ultra-Short 20+ Treasury Fund (TBT).
However, I think the frenzied safe haven buying of treasuries has come to an end. And here’s why:
1. A-grade corporate debt demand has jumped dramatically. At what is often talked about as the “October 10 lows,” investors didn’t just leave the stock market; they also left company debt. In fact, they left A-grade Wal-Mart and Procter&Gamble-like debt. At that time, the iShares Investment Grade Bond Fund (LQD) traded at 80. Ten weeks later, LQD is trading 20% higher.
Of course, it isn’t just the 20% capital appreciation in corporate debt that’s impressive here. It’s the fact that it is trading near the 100 price point that it historically traded at before the Lehman bankruptcy and Fannie/Freddie failure. What’s more, the 5% annual yield paid monthly is going to keep pushing LQD up to the 110 level, as any yield above 4% will be seen as attractive. And that money will likely come out of treasuries. (Read more on Investment grade bond ETFs right here.)
2. Stock market volatility is declining. I honestly never expected to be declaring a CBOE Volatility Index (VIX) reading of 43 as a “good thing.” It’s like a summertime in Phoenix, Arizona… “It’s 117 degrees and cooling down this week.”
In the past, any VIX spike above 30 was a sign of irrational fear. For the last 90 consecutive days, however, the VIX has traded between 30 and 89, breaking record highs and ushering in a new era of heightened “scared-to-death-ness.” All that said, the VIX is well below its 50-day moving average. What’s more, intra-day price swings have declined substantially each month since October. In other words, treasury overdrive may be wearing a bit thin.
3. Everything and the kitchen sink. The bear market itself may be getting long in the tooth. But stocks still have serious detractors. The possibility of a multi-year recession, as opposed to a “hoped-for” late 2009 recovery, may keep stocks in relative check.
But the central banks/governments around the entire world are fighting the credit crisis with everything and the kitchen sink. Some of the efforts will take hold, encouraging a bit of risk taking activity. That means money will come out of treasuries and go somewhere… whether it’s A-grade debt, foreign bonds, emerging bonds, preferred debt, convertible debt. In other words, the money does not have to flow into stocks for the ProShares Ultra-Short 20+ Treasury Fund (TBT) to thrive; it just has to leave U.S. treasuries… and I believe that it will.