Strategically Shorting Bonds
I have been shorting the 10 year Treasury strategically the last 6 months buying the oversold yield conditions right before the employment report ramp up in yields, it has been quite an effective trading strategy this year, and has contributed in part along with some oil and equity trades to being up over 30% versus the overall market returns for both bond and stock investors which we just approximate to the 10% range year to date depending upon exact portfolio mix.Â
Another Profitable Trade
Well I am profitable on this latest move up in 10-year yields, and I expect yields to continue rising through the 10 and 30 year bond auctions later this week, and I expect a strong retail sales number on Friday, and with the all-important FOMC Quarterly Forecast Meeting next Wednesday, I expect yields to run up through this meeting on a slow grind higher.
Stay Short Until Year End?
Therefore the question becomes where I close out the trade as I have December expiration 10-year futures contracts, and normally I would close out on a spike before, during or right after the FOMC Meeting. However, when I look around at the market landscape of assets to buy, sell or invest in for the remainder of the year, or in other words if I close out the position where do I go next? And there are just not a lot of appealing alternatives right now! I still view the 10-year Treasury short at least until year end as the best place to park money, as it is all about putting money to work in market places that offer real value, have a catalyst for future upside profit, and the risk reward profile makes sense, and the 10-year Treasury short just makes sense on all accounts.
Value, Catalyst & Risk Reward Profile
First of all the economy is improving, but even if it just maintained the status quo growth of 2%; bond yields are too low given a 2% rate of inflation, and the Fed Funds Rate shouldn`t be at zero percent, that will have to change, and the Fed recognizes this mismatch, even if we only create 140k new jobs each month, that is still lowering the unemployment rate.Â
The catalyst is that the Fed is getting out of the bond buying business in October, and they are going to raise rates in 2015. The value proposition is that all bonds from Global European Bonds to US Treasuries are over-valued and mispriced, or in a bubble that the fundamentals cannot possibly sustain. As I said in a previous piece on European Bonds specifically, just park money short every single European Bond or a basket of these bonds, and over a 10 year period you are going to make a good some of money.Â
