Shorting Treasuries With Inverse ETFs

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May 28, 2009 9:48am NYSE:TBT NYSE:TMV

government2Today is a day to give thanks. I know it’s a little early for Thanksgiving, but I’m talking about being thankful to Uncle Sam and the U.S. government for the bountiful opportunity they have given us to make huge loads of money in a relatively short amount of time. I’m talking about shorting U.S. debt via 2 specific, but very risky vehicles:

Ultrashort Lehman 20+Year Treasury Proshares (NYSE: TBT)
Direxion Daily 30 Year Treasury Bear 3X Shares (NYSE: TMV)

Since the collapse of the yield curve late last year when people were panicked in the market such that they were willing to take NEGATIVE returns on their money via U.S. Treasuries to ensure some type of safety, things are starting to normalize now, and in fact swing the other way.

This has given us one of the biggest opportunities in the last 50 years to take advantage of a punch drunk bumbling and stumbling government spending itself into possible oblivion.

A little harsh you say?

Perhaps, and I’m not one to judge, but I am certain of one thing: As Warren Buffett recently stated, the bubble in U.S. Treasuries is one of the largest of all time, even bigger than the housing bubble that we just witnessed collapse.

In fact, Buffett highlighted the sale in late 2008 by Berkshire Hathaway of a Treasury bill for a negative yield.

Buffett wrote in Berkshire’s annual letter in February that when “the financial history of this decade is written…the Treasury-bond bubble of late 2008″ may rank up there with the housing bubble of the early to middle part of the decade.

What The Heck Are You Talking About?
For those that are uninitiated, I’ll break it down in simple terms:

The U.S. government is printing money.

They are doing this to help stave off an apparent collapse in the banking sector, add liquidity to the market, AND prop up the U.S. economy with various stimulus packages.

How do you come up with money that you don’t have?

You borrow.

So how does the U.S. government borrow?

They issue Treasuries dated in different maturities ranging from 1-30 years.

Who buys this debt?

All sorts of folks from around the world, but mostly our neighbors to the East, China, Japan, and other countries.

What terms does the government have to offer them to take on ever increasing amounts of our debt?

Well, not too long ago, those terms were rather modest, and were akin to basically borrowing money for free, with yields going down below 3% for the 30 year notes in late 2008, and far lower yields for shorter maturities, it was a no brainer to take on more debt when being able to pay it back at such favorable terms.

That however, is now changing with Treasuries declining about 20% from those highs, and the yield now over 4% and climbing fast.

What happens when lenders, or buyers, don’t want any more debt?

We have to increase the payout they get for taking on more debt, thus lowering Treasury prices, and increasing the yield, since they work inverse of each other.

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