Trade the Bond Bubble Bust with TBT

Take care -- leveraged ETFs can move fast

   

The yield on long-term Treasury bonds is going ballistic. In May, the benchmark 10-year Treasury yield vaulted from 1.60% to 2.12%, or more than 50 basis points in just four weeks.

This spike in bond yields has been accompanied by a substantive slide in the price of long-dated Treasury bonds. From April 30 through May 30, the value of the iShares Barclay’s 20+ Year Treasury Bond Fund (TLT) has dropped 6.5%. This fund is essentially a proxy for the long end of the Treasury bond maturity spectrum, and it’s been under the spell of sellers for essentially the entire month.

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A glance at the chart here of TLT shows the ramped-up selling in May. That selling sent this fund below both the short-term, 50-day moving average as well as the long-term, 200-day moving average earlier this month. And while TLT now trades slightly above its recent low, the fund hasn’t traded in this price range since early March.

The slide in bond prices is in large part a signal the market has sent—a signal that’s letting us all know that it expects the Fed to begin “tapering” its current monetary policy at some point in the not-too-distant future. Essentially, what bond traders are saying is the quantitative easing endgame is about to commence, and because tighter monetary policy is a negative for bond prices, the market has reacted accordingly.

As a trader, you have two ways to make sure you profit from this situation. The first is to make sure you reduce your exposure to long-dated Treasury bonds. The second is to buy a fund that goes higher as bond yields spike, or stated differently—as the bond bubble bursts.

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My preferred candidate for the latter task is the ProShares UltraShort 20+ Year Treasury (TBT).

This is a leveraged fund designed to deliver twice the inverse of an index called the Barclays U.S. 20+ Year Treasury Bond Index (the same index that TLT mirrors), which basically tracks the performance of the long end of the Treasury bond spectrum. With TBT, if bond prices fall 5% then TBF should rise approximately 10%.

If what we are seeing is the beginning of a busted bond bubble, then being long TBT now will allow you to capture some outstanding gains over the next several months. Buying TBT at the market here ($67.68) should, I suspect, be good for a spike of about 20%-25% by the end of summer.

At the time of publication, Jim Woods did not hold a position in any of the stocks mentioned here.


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