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How to Trade the Treasury Market

Wade Hansen illustrates the yield curve for Treasury notes, Treasury bills and Treasury bonds and shows you how to trade the action in the Treasuries.


Video Transcript

What we tend to see is that the farther out in the yield curve we go, the higher and higher the yields tend to move. Recently, based on the actions the Fed has taken its quantitative easing and Operation Twist, we have seen these yield curves flatten quite a bit.

With Treasuries, we have an inverse correlation between the price of a Treasury and the yield of a Treasury. When price is going up that means the yield is going down and vice versa. When price is going down, it means yields are going up.

So, as we look at iShares Barclays 20+ Year Treasury Bond (NYSE:TLT), it is focusing on the price of these longer-term Treasuries, not the yield. So, it’s always important to remember whenever talking about Treasuries or funds that are investing in Treasuries or other types of bonds what it is we’re focusing on. So, with TLT, we are focusing on prices.

So, as we look at the chart of TLT in this video, you can see that the price of TLT had a dramatic rise coming into the first part of 2012. It’s dropped off and found some support right about the $120.50 level, where we entered a trade in TLT. It had one moment where it dipped down and quickly reversed course back up but, for the most part, it has been a pretty solid trading range, bouncing back and forth, back and forth and back and forth.

We’re anticipating a move higher here on Treasury prices. If we start to see some break down in the discussions and negotiations over the fiscal cliff, what we will most likely see is – Traders have a lot of choices in their investment options, but one of the main choices is between bonds, on the one hand, and stocks, on the other, so if investors are putting a lot of money into stocks, you can imagine that some of that money is going to be coming out of bond or Treasury market.

The opposite is also true. If we see stock prices starting to fall and people are selling out of their positions, we know that some of that money is going to find its way back to the bond or Treasury market. So, if that happens, what we’ll see is demand increasing for Treasuries as money is coming out of the stock market and moving into the bond market. Our basics of Econ 101 would tell us that that increase in demand means we should see a price increase in Treasuries.

So, we are watching for the potential for TLT to move up higher as demand for Treasuries increases, especially these longer-term Treasuries, and send the price of those Treasuries higher, which will move TLT up higher.

John Jagerson and S. Wade Hansen are co-founders of, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.


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