studentofmarkets

If we are in a ‘Bond Bubble’, as Marc Faber suggested, would it not make sense to consider the fact that this bubble may pop?  If that happens, one would expect the prices of US Treasuries to fall and yields to increase.

How could we ever trade such a scenario?  What sort of vehicles are there for a retail investor to utilize?

There are some ETF’s out there to trade the long side of Treasury Bonds:

TLO – SPDR Lehman Long term Treasury

IEF – iShares Lehman 7-10 Year Treasury

TLT – iShares Lehman 20 Year Treasury

However, there are no ETF’s that specifically short US Treauries.  Ok, there is one, but I hate it.  It is the SHV and when you look at the chart you will understand.  I was looking for an inverse of the TLO, but what I found was a technical mess.  I cannot recommend this for any sort of trade.  I posted the Index behind the chart to see what I was expecting the ETF to be the inverse of.

So now that we have established that there are only long Treasury ETF’s, does that mean we do not have a trade?  Absolutely not.  There are options on these ETF’s – both calls and puts.  A put option is a vehicle to use when you believe the price will be dropping. You could also sell these ETF’s short.

Of course, these options are not very liquid.  And they will, of course, expire.  So they are not for the faint of heart.  Or light of wallet. And shorting the ETF’s might pose a problem in that they are not the most liquid funds being traded.  It may be difficult to get your order filled.

Nothing worth having ever comes easy, right?

So which one of those Bond ETF’s will we want to short when it comes time to short them.  On a chart against the index, it appears that each of the funds is performing along with the index:

We will keep an eye on this as a potential trade.  I will certainly be on the lookout for non-stock market trades in 2009.  Everybody will be looking for the bottom and the beginning of the recovery … and it is something I want to AVOID.  I believe this may be a less-crowded trade that will allow us a good entry and exit.

We are not there yet, but I will watch.  The latest breakout for the US Treasury Bond Index was at 140.  If the index falls below that, we may get our chance.

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