October 28, 2010 – The Fat Lady is Still Singing in the Treasury Market

Featured Trades: (PEAK TREASURY BONDS), (TBT), (TMV)
ProShares Ultra Short Lehman 20 + Year Treasury ETF
Direxion Daily 20 Year Plus Treasury Bear 3X Shares ETF

2) The Fat Lady is Still Singing in the Treasury Market. To say that things have gone well for the Treasury bond market this year would be one of the understatements of the century. First there was a global flight to safety triggered by the European debt crisis. Then there was the mad rush by hedge funds to cover shorts in securities they believed were the world's most overpriced assets. Then Ben Bernanke appeared on the scene with QEII, sending bond prices everywhere to 50 year highs.

Every academic study showing that government paper had 30 years of underperformance ahead of them, including my own, only seemed to drive prices higher (click here for 'A Visit to the Insane Asylum'). In fact, my report on 'The Great Bond Market Crash of 2010' lagged the actual peak in bond prices by just five days (click here for the piece). At the August high, the Treasury market was effectively discounting 0% inflation for ten years, an insanity I was happy to bet against.

The recent action in the markets suggests that the turn may finally be behind us. Why have bond prices been falling for the past month, despite an assumed promise by the Fed to provide unlimited amounts of liquidity? Why has a ton of Chinese and other foreign buyers failed to set a new high. Is it possible that the fat lady is at last singing in the Treasury bond market?

Let's say we get a 'RISK OFF' reversal in global financial markets. The short Treasury Bond ETF (TBT) bottomed at $30 at the end of August and has made it back up to $34.  Take it back to this year's high of $52 and that gives you a 73% gain off the bottom. The 2009 high gets you to $60, an even 100% return. If you don't feel like betting the ranch here and want to approach this in a sober, risk controlled manner, look at the cheap, out-of-the-money March or June, 2011 $45 calls on the (TBT). Get this one right and the profit will be several fold.