Diary of a Financier

…I’ll Buy Long Treasuries

In Capital Markets on Wed 17 Aug 2011 at 22:49

I left my last entry open-ended:

You know I’m bearish on the coming weeks. I might forgo the market timing by buying some intermediate/long bonds as soon as tomorrow. Consider it my test balloon, after which short equity positions will soon follow. I’ll be crunching some data in the wee hours of Wednesday. Maybe I’ll post some numbers later in the week, but I need to figure out which vehicle yielded the best total return between April 1-August 21, 2010: US Corporate Credit (CLY/CIU), Long Treasuries (TLT/TLH), or Intermediate Treasuries (IEF).

I haven’t opened any new positions yet, but here are the results I came up with after running the total return numbers for the following securities from between April 1-August 21, 2010 (the end of QE1 & the announcement of QE2):

CIU +5.52%

CLY +13.59

LQD +8.47

IEF +11.92

TLH +15.27

TLT +21.24

I did substantially more research–some of which follows herein–but suffice to say, I’ll be utilizing 20+ Year Treasuries (TLT) when the time comes.

Now, TLT recently failed resistance at a double top around $108.25, which also represented a 1-sigma move above its linear regression channel. That’s a substantial move for commonly docile Treasury bonds–even the long-dated variety. These are uncommon times, however. While the short-term fractals have me expecting a momentary pullback in the coming days-week, I find unequivocal bullishness in the monthly chart:

TLT daily- although near a 1 sigma extreme, long Treasuries will rally beyond resistance as long as QE3 is deferred.

TLT monthly

Finally, a review of 30-year Treasury Yields (TYX) is an appropriate means of backward math to check this premise. TYX will immediately try to bounce of triple support again around 3.55, but it will test lows near 2.90 in a matter of weeks-months, which is also consistent with my mid-year Outlook. Crazy, I know:

TYX daily- perhaps a relief rally up to 1st resistance at 3.80, 2nd at 3.90 is conceivable (which would prompt me to go all-in), but yields should brush 2.90 in weeks-months.

TYX monthly

When I sniff the air, I gather the familiar stench of the party-line consensus, ‘Stocks are cheap relative to low-yielding Treasuries; look at S&P 500 earnings yield and dividend yield.’ This is my Diary so I want to be frank about my own psychology. I feel like a bet against Treasuries is the contrarian play, despite the mainstream promotion of such a stance. Maybe my enigmatic psyche has roots in the time-honored tradition of parking capital in T-bonds/bills during uncertain times. It’s as if I’m reassuring a nagging voice in my head when I say this, but I am concerned about the mounting case against Treasuries. The anxiety is shared widely, yet it still feels uber-contrarian, even taboo. Yes, I do think the unprecedented gains in T-bonds will be met with an unprecedented unwind akin to the bond massacre in 1994. “Mean Reversion” adds substantial risk to any position in US Treasury securities, but that risk should arrive, however, months-quarters away. I cannot argue with the implacable determinism of long-term technical fractals. I cannot envision an escape from the European malaise. Nor can I refute the heuristic psychology that will defer Fed action on a monetary front. The Treasury rally will exceed its 2010 ceiling, because no catalyst stands to oppose it.


  1. […] Beta singlenames–at around SPX 1193 on Thursday, August 18.  At the same time, I opened a long position in 20+ Year Treasuries (TLT).  I only executed half the desired stake in TLT, because I feared a […]


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