June 23, 2010 – The Bond Market is Blind to Risk

Featured Trades: (TREASURY BONDS), (TBT)
ProShares Ultra Short Lehman 20 Plus TBT

1) The Bond Market is Blind to Risk. After promising to deliver you a nicely marbled, medium rare, prime rib, I am the first to admit when I actual come up with a piece of tasteless, salt water injected Costco turkey. I am talking about my suggestion that Treasury bond prices would fall this year, and that the best way to play it would be through the leveraged short ETF (TBT). Nimble traders were able to wrest three round trips out of a $46-$51 range in Q1 before a flight to quality broke it down to $36 during the April-May sell off. But if you didn't keep stop losses in place, which I always highly recommend, you got hammered. After listening to The Ascent of Money author and Harvard business school professor, Niall Ferguson this morning, I am more convinced than ever that this trade will have its day in the sun. The next financial crisis will be a chain reaction that has already started in small, peripheral European countries, and will spread to large European countries, eventually hitting Japan and the US. From a fiscal point of view, the US is no better off today than Greece or Spain. The next crisis has already started at the state level, where there is little choice but to dramatically cut spending and increase taxes. Debt service will soar from the current 11% of the federal budget to a gob smacking 28% as early as 2014. When this happens, the Treasury bond market will become extremely sensitive to even the smallest changes in interest rates. A reassessment of American credit worthiness could tip us into crisis very quickly, possibly as soon as two years. Washington is doing nothing to avert the impending crisis, and with ten year yields now at a paltry 3.24%, the bond markets are clearly blind to these risks. Prices will eventually head downtown on an express train. I'm not wrong on this one, just early.

ProShares Ultrashort Lehman 20+ Year Treasury