Macro Tsimmis

intelligently hedged investment

SELL ProShares UltraShort 20+ Year Treasury (TBT)

Posted by intelledgement on Fri, 06 Aug 10

We still like the macro analysis behind this play: as the supply of US debt increases, eventually, demand will dampen, and the incentive to buy long-term treasuries will have to rise to sustain enough sales to finance the government’s operations (not to mention interest payments on previous borrowings). This will depress the value of long-term treasury bonds, and thus cause the value of shares in this 2x inverse exchange-traded fund to increase.

However, timing is everything. We have pretty much been waiting—patiently but fruitlessly—for 18 months for this scenario to unfold. While for sure this means we are 18 months closer to a payoff here, we are up against a powerful flight-to-safety dynamic which, ironically, has ensured ever-increasing demand for long-term treasuries. No matter how many times we ask ourselves “Who would be nuts enough to loan the U.S. government money for twenty or thirty years?” the answer most days for the past 18 months has been “just about everyone.” When the alternative is an equity market where the value of even blue chips is unreliable (Citigroup down from $23 in 2009 to $1 in 2009 to $4 now; WAL-MART down from $63 in 2008 to $46 in 2009 to $52 now; Best Buy $47-$17-$34; Intel $25-$12-$20; etcetera) the guaranteed principal and ROI (albeit paltry) of treasuries looks like a veritable port in the storm.

And even though the long-term debt issues besetting the USA sans structural reform are as challenging as anything facing Spain or Italy today, the immediacy of the sovereign debt problems in Europe have only enhanced, relatively speaking, the shininess of U.S. treasuries.

Add to that the exigencies of deflationary pressures engendered by the side effects of deleveraging—viz., tight credit, continued pressure on real estate prices, and reduced consumer spending—which conspire to compel central banks to keep interest rates low. This does not per se guarantee low interest rates on treasuries, but it sure creates a headwind that pushes in that direction.

So we’ve got the best damn duck blind on the pond here, no doubt. But it’s been 18 months and all the ducks keep eschewing this pond in favor of neighboring ones. We will doubtless be back here, but in the meantime, we are cutting our losses (about 15%) and moving somewhere else with a better chance of bagging some dinner now.

Previous TBT-related posts:

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