Bond Bubble
We’ve noted the extreme moves in Treasuries — up in price, down in yield — here at BMB recently.
Here’s Frank Barbera at Financial Sense tonight:
With the evidence of the global recession deepening steadily over the last three months, we have seen a near continuous liquidation work its way through the hedge fund community, where highly leveraged trades borrowed in Yen have been forced to liquidate. The result has been a tremendous flight to quality and a flight to liquidity with US long term bonds a prime beneficiary. Thus, as the Dollar, Yen and Treasury Bond have gained strength, virtually all other markets have collapsed with asset values across a very wide spectrum under very steady selling pressure throughout this time. Perhaps no asset has been under more pressure than Oil, where prices briefly approached $40 earlier this week. Yet even as the air waves of cable TV fill with fervent deflationary forecasts for even lower Oil prices and even lower bond yields, the evidence continues to mount that the current extremes look historically overdone. I believe Treasury Bonds are the last great bubble yet to pop. As the New Year approaches and a great deal of the forced hedge fund liquidation comes to its end, odds are high the Treasury Bond yields will begin to reverse and chart an upward course during the first quarter of 2009. In my view, Bond yields are near what promises to be an historic secular low.
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This may be a stupid question, but if Frank is correct, how does one capitalize on this?
Comment by Owen — 12/9/2008 @ 7:27 pm
You could risk a short bond play like the etf TBT. I wouldn’t recommend that. The best play may be to just play somewhere else away from long dated treasuries.
For myself, I am just sidestepping the whole issue by staying with two year treasuries and a little money in a TIPS fund.
Comment by Fred — 12/9/2008 @ 7:44 pm
A few ideas for if/when the turn occurs: 1) you could short the iShares bond ETFs like IEF or TLT, or 2) ProShares now has Ultra short bond ETFs. You could buy PST or TBT.
Like Fred said – I wouldn’t be a buyer of long bonds here.
Comment by BMB — 12/9/2008 @ 7:47 pm
Thanks for your comments. I struggle when it comes to bonds and how to play them. ETFs prove themself again to be a very usefull investment vehicle. Thanks again.
Comment by Owen — 12/9/2008 @ 8:22 pm
One more thing – don’t forget that Frank B. was talking about this possibly being a secular low for bond yields. They’ve been declining since 1980, and if they turn around and start to move higher, it could be a long, drawn-out process. You have to differentiate between ‘trading’ and ‘investing’ timeframes, and decide if and how you choose to play it.
Comment by BMB — 12/10/2008 @ 8:15 am