Saturday, January 31, 2009

Treasury Bond Market Update

On January 11, 2009 I published this post calling for a rapid fall in long term treasury bonds. At the time TLT, the 20+ year treasury bond ETF, was trading at 112.73. Since then, TLT has dropped to 103.75, a fall of 7.97%. For a stockholder, a short term drop of 7.97% is no big deal but for a long term bondholder, this is a big loss. Considering that 30 year treasury bonds now yield 3.6%, that is a loss greater than two years worth of interest payments.

Those that got out of their long positions in TLT saved themselves a lot of money. Those that shorted TLT did quite well. Those that bet against the price of long term treasuries by buying TBT, the ProShares UltraShort 20+ year treasury bond ETF, did even better and are now up 14.66%.

My original call was for a fall in TLT to 83.74 by February 15th. Let's re-examine that call today.

Here is a 6 month candlestick chart of TLT with bollinger bands:

TLT 6 month candlestick chart with bollinger bandsTLT pierced the top of the band in December and has since come crashing down. It is now sitting right at the bottom of the band.

Here is a 1 year candlestick chart of TLT with 100 day and 200 day moving averages:

TLT 1 year candlestick chart with 100 and 200 day moving averagesTLT took off in the middle of November while sitting at the 100 and 200 day moving averages. It has since crashed back down to sit exactly at the 100 day moving average but is still well above the 200 day moving average.

The technical characteristics for TLT of sitting at the bottom of the bollinger band and at the 100 day moving average points towards at least a short term bounce.

Here is a 6 month candlestick chart of TBT (the ProShares UltraShort 20+ year treasury bond ETF):

TBT 6 month candlestick chart
The chart itself is not important, but take a look at the volume. Volume has exploded from only 100,000 per day just a few months back to 5+ million in the past month! Compare this to TLT, which has had strong but not extraordinary volume. TBT has increased in volume so much that it is actually more heavily traded than TLT at the moment! This jives with the anecdotal evidence I have seen on financial websites, blogs and message boards in the last month. I never saw TBT discussed before but now I see it brought up in almost every discussion. This trade has gotten awfully crowded awfully fast.

Finally, if you have not done so already, please refer to my previous post titled The Fed Will Buy All Treasury Bonds in Existence if Necessary. In that entry, I made the case that the Fed's threats of buying up long term treasury bonds might not be just a hollow threat. Ben Bernanke said himself in a 2002 speech that the Fed can control long term bond prices by announcing a price floor on bonds and then buying up all bonds at that price. Since Bernanke has followed through with all of the other policies that he outlined in that speech and the seemed wild at the time, I see no reason to doubt that he will not go forward with this policy as well. This simple announcement by the Fed would cause unimaginable pain for those short TLT or long TBT.

When we look at the technical signals in TLT and TBT and then examine the potential for the Fed to step in and move the long term treasury bond market at a moment's notice, now looks like an excellent time to reverse positions and cover any short positions in TLT or long positions in TBT. Aggressive traders can go long TLT or short TBT to play this trade, though I would suggest a tight stop loss for those that do so. I hate to reverse my prior call before the deadline of February 15 that I had previously set, but when the facts change I change and I think it is time to reverse positions.

Note: I can and will be wrong with my trading suggestions. Do your own due diligence and never commit more funds to a trade than you are willing to lose.