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Get Shorty on Treasuries with TBT

TBT delivers twice the inverse of the price of TLT


There’s no denying that there’s been a Treasury bond bull running through Wall Street over the past five years. The flight-to-safety trade has caused a lot of money to flow into what has traditionally been a great place to park capital in times of turmoil. This trend has pushed the value of the iShares Barclay’s 20+ Year Treasury Bond (NYSE:TLT) to a total return of 17% over the past five years.

Now, many bond mavens have been speculating that a continued push higher in Treasuries isn’t likely to continue into 2013. I’m not sure how accurate these bond bubble predictions will ultimately turn out to be, but what I am sure of is that two recent events are pushing sellers into the space, and that’s a tradable event you can exploit.

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Since the mini-deal on the fiscal cliff was reached, TLT, a proxy for the long end of the Treasury bond maturity spectrum, has plunged more than 4%. This unwind in the Treasury bond space accelerated after Thursday’s release of what I consider to be hawkish Fed minutes. Most market watchers, me included, weren’t expecting to read that there appears to be a split at the Fed as to when the latest round of QE, i.e. the $85 billion per month of Treasury and mortgage backed security purchases, is going to cease.

Some of the Fed’s governors hinted that the current round of QE should end sometime midyear. Others argued for the current policy through 2013. The details here are less important than the acknowledgement that the Fed can’t keep doing what it’s been doing forever, and that eventually we are going to begin taking steps toward tighter monetary policy. A move toward tighter monetary policy is an obvious negative for bonds, and hence the accelerated decline in the value of the 30-year bond.

For traders looking to jump on this trend, you can do so via an ETF that’s leveraged, and that is designed to deliver twice the inverse of the price of TLT.

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This fund is the ProShares UltraShort 20+ Year Treasury (NYSE:TBT). A look at both the chart of TLT and TBT together shows you the relationship between the two funds. Simply put, during periods where bond prices are falling (and bond yields are rising), you see a big gain in the value of TBT.

I like this fund for a short pop here on a continuation of falling bond prices and rising bond yields. As you can see, the fund recently broke out above its 50- and 200-day moving averages, a very bullish signal for traders. Now, I don’t think this is a trade you will want to hang on to for the long haul. The pending debt ceiling debate will likely generate a lot of uncertainty in February, but until then TBT could be a place to add a little alpha to your portfolio.

I like TBT under $68, and I suspect the fund could spike higher to around $75 — a level it reached in April 2012 — before the real fight over the debt ceiling claims traders’ attention. That’s a solid spike of about 12% off current levels. As for your downside protection, keep in mind that TBT is a leveraged fund, so you will want to be a bit looser with your stop-loss. I would set a stop at $60, which is where the fund began trading in December.

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

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