Shorting the Long US Treasury Bond
I have been recommending a short on the long US Treasury bond for about the last six to nine months through the use of an exchange traded fund called ProShares UltraShort 20+ Year Treasury ETF (TBT), particularly when this ETF hit an all time low about 6 months ago as Treasury bond yields hit the lowest levels seen in decades. Below I have charted the spread between TBT and the Gold/Silver index. I believe the Gold/Silver index is a good indicator of future inflation expectations, which clearly have not been reflected in the long bond yield for a number of reasons. The Gold/Silver index is also an indicator of a lack of faith in paper currency, which also does not bode well for investments such as Treasury bonds. The Federal Reserve continues to intervene in the Treasury market by buying bonds, which is artificially depressing bond yields. External shocks, such as the European Sovereign Debt Crisis, the tragic disasters in Japan and war in the Middle East have caused many investors to return to the relative safety of bonds, if only temporarily, which has also helped keep bond yields down. When the Fed's intervention ends, the US Government's massive borrowing to finance persistent deficits will continue and inflation pressures also continue. These will ultimately cause the long bond yields to naturally rise from generational lows.
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