May 5, 2010 – Shrinking Federal Deficits Bode Ill for Bond Shorts

Featured Trades: (TBF), (TBT), (TMV)


2) Shrinking Federal Deficits Bode Ill for Bond Shorts. I have written at length about the rapid repair in California's finances that sparked a bull market in its municipal bonds. Brace yourself; the same thing is happening at the federal level. Tax receipts from the healthy sectors of the economy are shrinking the government's deficit much faster than even the most wild-eyed optimists were expecting. This year's federal budget deficit was originally forecast at a record $1.6 trillion. The Treasury recently cut this figure down to $1.4 trillion. Now private analysts are posting even lower numbers, with Deutsche Bank at $1.3 trillion, Nomura at $1.28 trillion, and Jeffries & Co. at $1.2 trillion. Business Insider has come up with another interesting analysis. While government debt is still huge, rapid deleveraging since 2008 has caused the total public and private debt in the US to actually fall by $438 billion (see chart below). According to Federal Reserve figures, financial companies cut debt by a whopping $1.8 trillion, households by $237 billion, and non-financial companies by $200 billion, thus overwhelming anything the feds are taking out. This further reinforces my belief that it is going to be a long wait before we see a collapse in the long dated Treasury markets, and that readers should continue to trade, and not invest in, the short Treasury bond ETF's, the 1X (TBF), the 2X (TBT), and the 3X (TMV).
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