TBT WTF

I've recently been thinking about several investment ideas for my personal accounts, one of which centers around my bearish view of the bond market...which has lead me to TBT.

From this post, I'm looking to generate the following dialogue:

1) How QE2 has effected the market and more specifically this security and what other upcoming/possible macro events could lead to bond prices dropping. I understand bond markets but am not intimately familiar with ETFs yet, especially those of the leveraged variety. Everything I've seen (soaring US debt, all-time low treasury yields) would tell me it would be a great time to short US bonds. This brings me to the next discussion I would like to have with you monkeys.

2) Why has this investment not picked up more steam...or maybe I should say when do you think this thing is gonna pop and the TBT soar? And why are leveraged ETFs like this not a good long-term play? I've heard they are but haven't looked at the financial engineering to fully understand the reasoning.

I am by no means a professional trader and don't pretend to be an expert on the subject (I'm in real estate private equity) so please refrain on throwing monkey shit my way...just looking to better understand the subject.

Thanks guys

 

Leveraged ETFs are not a long term play because they settle daily and their returns deviate significantly from the return you would expect.

With that said, I would not go short bonds right now, not until inflation proves its self to be true. If it looks like inflation is being realized, these bonds will jump because the ben bernank will raise interest rates to stop it from going out of control, but if inflation is not realized, then this recent fall in bond prices will follow another surge. So instead of blindly placing a bet, wait it out. I'm watching the bond market daily and I think I might just go long bonds just before the CPI report next week as I feel they will turn around and go higher.

But yeah don't play leveraged ETFs long term

 
Nikhiln25:
Leveraged ETFs are not a long term play because they settle daily and their returns deviate significantly from the return you would expect.

With that said, I would not go short bonds right now, not until inflation proves its self to be true. If it looks like inflation is being realized, these bonds will jump because the ben bernank will raise interest rates to stop it from going out of control, But yeah don't play leveraged ETFs long term

Will the ben bernak get the goldman sachs approval/help for raising rates ?lol

"Seeing this house and your fine sword and hearing how you're importing and exporting chinamen, let me guess, you must be fucking rich." Kenny Powdersss
 

Thank you guys, especially Nikhiln25. Good explanations...

Wasn't aware of the daily settlement. Also, I should have made the distinction between a short term trade and long term investment ideas, I always viewed TBT as the former given the warnings about long-term investing in these ETFs...just didn't understand why. Part of my quandry was my long term view on bonds and how to capitalize on it. For instance, interest rates HAVE to rise at some point since we're close to zero now. Unless you think the world is ending (which some people do) the economy has to pick up at some point, whether its in 6 months or 3 years. People have differing opinions depending mostly on which economic indicators/politcal moves you put your faith in. Like I said, I am no professional and am just now trying to manage my personal accounts...I've just been brainstorming lately with the little time I have.

Thanks again guys, and any additional commentary is always welcome.

 
GoodBread:
TBT has been performing quite well actually. I was hoping the tax deal might push bonds back up for another TBT opportunity but the market is fast losing its trust in treasuries, "bond vigilantes" or not. I'm just cursing myself for not funding my Optionshouse account sooner (OTM TBT calls are a good play).

You are my twin. I've been playing the TBT via calls on OptionHouse platform.

 
Best Response

Agree with above, the ETF corresponds daily, and isn't really useful for a long-term investment.

That said, I would seriously reconsider being short bonds. In the near term (next month) they may still go down, but I'd say after the new years you might want to consider going long, particularly the long end of the curve. I don't think the economic backdrop looks good enough for the interest rate cycle to have peaked. In addition, deflation risks still exist. Take a look at yesterday's consumer credit report. If you take out student loans (which are backed by Federal Government in data link below), consumer credit continued to plunge. Consumers are paying down debt, companies are holding massive cash reserves, state and local governments will be cutting back on spending (see Cisco earnings report to see their 2011 outlook on government spending), unemployment at 9.8% (with no pickup in sight), the federal government announced a wage freeze. All of these things point toward a deflationary backdrop which will undo the "inflationary" aspects of QE2 and Stimulus 2.0 (The tax-cut extensions, jobless benefit extensions that were all passed yesterday basically amount to a second stimulus and can only be funded by issuing more debt).

The long notes and bonds are detested by everyone. Perfect contrarian trade. I'd go long in a few months to pick up some big gains.

And if you don't feel safe since WS research houses aren't bullish, check and see where they thought 10 year notes would be by EOY 2010, and look at where they actually are today.

Forgot the links: http://www.federalreserve.gov/releases/G19/Current/ http://www.cftc.gov/files/dea/cotarchives/2010/futures/financial_lf1123…

looking for that pick-me-up to power through an all-nighter?
 

LIBOR definitely has a point. EVERYONE is all over the short bonds trade right now and it would be fitting for bonds to go for a last gasp. I could see this playing out over 6-9 months though because I think equities still have a little while to go, what with reduced selling pressure as the new year begins and how resilient equities have been thus far.

edit: 3-6 months before equities go lower. 6-9 seems like too long, but what do I know?

 

The bonds yields went down before QE 2 was announced because usually yields head lower in times of monetary expansion, and deflationary environments. That's what happened in 2009 and that's what happened in the summer. So why are the bond yields going up right now? For one reason only, higher expected inflation..with higher inflation comes higher yields. And like I said before if inflation is not realized, these bond yields will come crashing down again.

And btw, an extension of current taxes =\= tax cuts and it does not =\= stimulus. It will be interesting to see if the proposed measure will clear the house( which oppose the conditions for the estate tax)

 
Nikhiln25:
The bonds yields went down before QE 2 was announced because usually yields head lower in times of monetary expansion, and deflationary environments. That's what happened in 2009 and that's what happened in the summer. So why are the bond yields going up right now? For one reason only, higher expected inflation..with higher inflation comes higher yields. And like I said before if inflation is not realized, these bond yields will come crashing down again. If, like Charles Evans claimed, we are in a liquidity trap, QE 2 won't do anything. So instead of placing a blind bet, see which way the economy goes. Yields have plenty to rise and you have enough time to secure a safe profit . Watch for the unemployment situation along with inflation. A miss next week in inflation numbers will send bonds rallying and yields crashing

And btw, an extension of current taxes =\= tax cuts and it does not =\= stimulus. It will be interesting to see if the proposed measure will clear the house( which oppose the conditions for the estate tax)

 

Nikhiln25,

Again, great comments but I think my comment still holds. Although there is obviously a chance that QE does not work and rates remain low for more than a decade while we face deflationary pressure (like Japan), rates WILL increase again at some point. To your point though, TBT is not a good option for a long-term investment and would be crushed if this exact scenario played out.

I agree on the misconception that the Bush tax extensions = tax cuts. This is pure conjecture, actually, just a sales pitch on the part of some politicians. It won't stimulate anything, just a preventative measure for attempting to keep the economy from entering a double dip recession.

 
wiggityWACC:
Nikhiln25,

Again, great comments but I think my comment still holds. Although there is obviously a chance that QE does not work and rates remain low for more than a decade while we face deflationary pressure (like Japan), rates WILL increase again at some point. To your point though, TBT is not a good option for a long-term investment and would be crushed if this exact scenario played out.

I agree on the misconception that the Bush tax extensions = tax cuts. This is pure conjecture, actually, just a sales pitch on the part of some politicians. It won't stimulate anything, just a preventative measure for attempting to keep the economy from entering a double dip recession.

I totally agree that a trough in the 30-year yield will occur within the next couple of years, and that we will see this security's value decline for some 30+ years after that. The real question is, when will the bottom in rates occur (or have we already seen this)?

I look at the above mentioned indicators (unemployment, output gap, consumer credit, buildup of cash on corporate balance sheets, expected slowdown in government spending) and everything points to a deflationary, low growth environment which is ripe for a final rally in the 30 year bond (which has been rallying since 1982 when it hit a high north of 13%). The GDP and CPI data are confirming this trend as well. I personally do not believe we have seen the bottom in rates and expect yields (on 30 year) to fall to about 2.5% within the next three years (Note I'm not an economist just an enthusiast).

The point is, you can make money over the next couple of years investing in the 30-year, or some other asset class, instead of shorting it now, waiting for yields to bottom, then profiting only after the inflection point is reached.

looking for that pick-me-up to power through an all-nighter?
 
wiggityWACC:
Nikhiln25,

Again, great comments but I think my comment still holds. Although there is obviously a chance that QE does not work and rates remain low for more than a decade while we face deflationary pressure (like Japan), rates WILL increase again at some point. To your point though, TBT is not a good option for a long-term investment and would be crushed if this exact scenario played out.

I agree on the misconception that the Bush tax extensions = tax cuts. This is pure conjecture, actually, just a sales pitch on the part of some politicians. It won't stimulate anything, just a preventative measure for attempting to keep the economy from entering a double dip recession.

Investing on the basis on something has to happen no matter what is as stupid as calling a hit when you have a 20 and not a single ace has been drawn by the dealer. Nothing HAS to happen. Japan has had low yields for a decade and falling yields for 20 years. The yields will go up scenario didn't play out for them. You have to have a better reason to why you feel they will go besides thinking they have to

 

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