Today I shorted Treasury Bills...

[fuelie600]

I'm thinking the same thing. Here is another article supporting your thesis:

http://online.barrons.com/article/SB123094029415750267.html?mod=b_hps_9_0001_b_this_ weeks_magazine_home_top&page=sp

The only thing that gives me pause is the lack of performance I saw in the oil & gas ultra-short funds as oil came down. Take a look at DUG for example. I would like a way to short the treasuries directly to avoid the fund's leverage reducing my return.

The following article looks at the problem:

ETF Math Lesson: Leverage Can Produce Unexpected Returns
By TOM LAURICELLA

Exchange-traded funds that use leverage are proof positive why investors need to read the fine print.

Many of these funds promise to deliver twice the return of an underlying stock or bond index -- or move twice as much in the opposite direction. So with the Standard & Poor's 500-stock index down 38.5% in 2008, a double-leveraged fund designed to profit when the S&P 500 falls would be up 77%, right?

Wrong. The UltraSHORT S&P500 ProShares rose 61%. Even more confusing, the ProShares fund designed to return twice the opposite of the Dow Jones U.S. Real Estate Index was down 50% for 2008, while the index was also down, by 43%.

The issue is that these funds are designed to double the index's return -- or double the inverse of that return -- on a daily basis. The compounding of those daily moves can result in longer-term returns that have a very different relationship to the longer-term returns of the underlying index.

For example, take a double-leveraged fund with a net asset value of $100. It tracks an index that starts at 100 and that goes up 5% one day and then falls 10% the next day. Over that two-day period, the index falls 5.5% (climbing to 105, and then falling to 94.5). While an investor might expect the fund to fall by twice as much, or 11%, over that two-day period, it actually falls further -- 12%.

Here's why: On the first day, doubling the index's 5% gain pushes the fund's NAV to $110. Then, the next day, when the index falls 10%, the fund NAV drops 20%, to $88.

The effect of compounding results in greater distortions when there are big up and down swings in the market. That's the reason the real-estate index and its double-inverse ETF were both down over the course of last year.

For the most part, these funds are used by short-term traders. But they're gaining traction among individual investors who use them as a hedge in a portfolio. That's where these distortions cause real trouble.

Take an investor who on Oct. 10 wanted to offset a $100,000 investment in an S&P 500 index fund by putting $50,000 in the UltraSHORT S&P500 ProShares. Two months later, despite big back and forth swings, the S&P 500 was pretty much unchanged. But that ETF was actually down 24% in that time frame, leaving the investor with a $12,000 loss.

To ProShares' credit, warnings about the disparity between daily and long-term returns are spelled out in the materials for the funds and on the firm's Web site.

"We try to get the concept out to people," says Michael Sapir, chief executive of ProShares. "It's just a feature of this kind of investing."

http://online.wsj.com/article/SB123111094917552317.html

--

ideas?

[Aurel]

I think I understand the mechanism, Wayne. I just don`t understand why you say you shorted treasury bills. You bought them and are betting that their rate will rise. Would shorting not be based on the opposite (betting that their rate will decrease) ?

[Aurel]

Okay got it. You bought an instrument that is based on the opposite of the treasury bills, hence the shorting. Now, explain to me the advantage versus buying treasury bills directly, if you know their rate will go up? Well, maybe treasury bills cannot be bought so easily, is that the answer?

[Vintage Racer]

Originally Posted by Wayne at Pelican Parts

The bottom line is that in 2009, rates will go up, possibly substantially. Firstly, we're going to be saturating the market with increased Treasury debt in 2009. Secondly, as we deficit spend into oblivion, then that will decrease the "credit rating" of the US, causing us to have to pay more to issue debt. Finally, the FED is pummeling the economy with cash, and that will lead to inflation, lots of it, in the coming years. It's only a matter of time - we're in an interest-rate bubble right now, and it cannot sustain itself.

I don't know any one that doesn't think that Treasuries will fall in value (increase in yield). Barron's had an article as well as the Wall Street Journal (several), Forbes, the Financial Times....

The way to make money on any short is to get the timing right. Your theory has the price of the bonds going up in 2009. I am not so sure that it will happen that way. I have a sizeable position in T-Bills and don't see me moving away any time soon. There is an old saying that I learned along time ago when I was a money manager "Never short a dull market". Treasuries are as dull as they can be right now.

I don't think the short will work until the economy turns around. I don't see that in 2009.

In order to protect and hedge against this, I bought a house with a fixed-rate interest loan (5.75%), and I just bought some of these two ETFs which rise when Treasury yields rise.

If you are hedging you take away much of the upside if you are correct. I also think it means you are less than positive in your theories.

A short requires the use of margin. You are also using margin with a loan on your house. The problem with margin is a guy can run out of liquidity before his trade becomes profitable (just ask those hedge funds that lost big last year).

I think there is a time to take risk and a time to be conservative ("Don't fight the tape"). I am staying conservative until the tape tells me otherwise.

I have never had a loan. I did own two businesses that didn't require a lot of capital (business loans are good, if used properly). I remember when the financial pundits would always argue that a guy should keep personal loans with low rates (mortgage, student, low rate car loans) and invest in the market because the market always went up 10%/year. They said it is a sure way to wealth!

That didn't work so well last year.

[oilonly]

My suggestion on what etf to buy for a rising interst rate/lower price for the ten year note is TBT.

Note: The fed said yesterday that they will be looking at buying Treasuries if long rates go up more than they want them to so watch out for when they do buy.



http://finance.yahoo.com/q/bc?s=TBT&t=1y

[Vintage Racer]

Originally Posted by oilonly

Note: The fed said yesterday that they will be looking at buying Treasuries if long rates go up more than they want them to so watch out for when they do buy.

That is true. The Fed will see that rates stay low so the housing market will start healing itself. Otherwise, home prices will continue their free fall which will further weaken the banks which will further weaken the economy. And the Fed can write a big check to be sure rates stay low.

When the economy starts to heal, and the Fed decides to stop keeping rates artificially low; a well timed short on the long bond would be profitable.

[304065]

There you go predicting the sunrise again, and this time you have bet that the sun will rise at midnight (Pacific time).

FOMC Transcript:

Release Date: January 28, 2009

For immediate release

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

It's you vs. the Fed with this trade.

[Porsche-O-Phile]

Is there a way to short CA Municipal Bonds? I'm betting those will default.

Of course, probably everyone else is thinking the same thing so this would probably have been priced in by now too...

[the]

Wayne, did you buy TBT or PST?

Your last link, Prudent Bear, I've been in that one for around a year, thankfully.

[Schumi]

www.updown.com

We all need to join, and have a competition.

I learn more and more on the market every day. Thanks Wayne.

[oilonly]

http://market-ticker.org/archives/756-On-The-Edge-of-The-Abyss.html

[tabs]

This is a NO BRAINER folks....Panic has ensued and people have moved into T Bills for safety and when that panic subsides interest rates will climb back to more normal levels...DUH!!!!

I will say it again, The Chinese and other furiners have the veto power over US spending. All they have to do is refuse to buy our debt. It might very well be redux of the late 70's and early 80's with 16% interest rates. That would spell the death knell for ANY economic recovery. THAT WILL STOP THE US GOVT FROM SPENDING.

The rational for the USD climbing in value and the Treasury interest rates sinking even into negative return territiory is that those furiners are more afraid of their own currency and economys than that of the good ole USA...

So is this an interest rate bubble in light of the financial meltdown or was this a rational move as the financial system DID collapse? You take your choich. Interest rates will climb from here as money will flow into other investment classes once the fear and panic subsides...that will happen once people get a clear idea of which way things are moving.

I gues the end of the world didin't happen after all...at least not yet.

[tabs]

If you really wnat to watch the wya things are moving..as a response to US policies...Watch 3 things

1. Price of Gold..always a hedge against bad times since the world began. Also reflects the true value of the USD. If GOld should climb above the $1000 mark to $1500 and continue to climb strongly...watch out

2. Interest Rates...reflects world confidence in the American economy, if furiners stop buying US Debt, they don't like nor think the US is doing the right thing. So if interest rates start to climb steadily because of poor participation in the Treasury auctions watch out

3. The exchange rate on the USD....the USD is just about the only currency of scale that has credibility, at least since WW2. If their is a mass exodus from the USD and its value starts to fall sharpely watch out

4. As a collorary..If there are moves to supplplant the USD as the exchange currency for oil..ohhh boy that is time to batten down the hatches.

The key here is to watch all 3 of the above indices, and if all three are starting to move in conjunction in the direction I have suggested then the jig is up.

[wrecktech]

None of the above will ever happen. No matter how bad our economy gets all the others will always be worse. America has the greatest capacity to create hence our strength. China may build it but they cannot create it. No other country can either. What ever happened to the Beta format?

[HardDrive]

Jebus, you guys are spooking the hell out of me. Wife and I just applied for a mortgage. $506k on the primary @ 5% + HELOC, variable, no year to year limit on % increases, $350k. We're bringing almost 30% to the deal, and they still won't go over $506k on the primary. It would take us 5-6 years to pay off the HELOC.

It would take a hell of a lot longer if interest rates were at 14%

[Porsche-O-Phile]

Dump the HELOC and get a fixed.

[HardDrive]

Originally Posted by Porsche-O-Phile

Dump the HELOC and get a fixed.

Well a fixed over $506k is a jumbo, and like hell I'm paying 7-8%. That statement might seem foolish years from now when the rates are 12%, but thats how I feel. I have a 5% ARM good for another 4.5 years. Jeez, we should just stay where we are and refi.......

[on2wheels52]

Wayne
Curious as to what % of your portifolio you converted to this stradegy.
Jim

[pwd72s]

Originally Posted by Wayne at Pelican Parts

My last call on Apple stock so far has turned out to be a good pick (up $14 since I bought it at under $79 a week or so ago). This week, after much discussion with various people, I decided to finally bet short on Treasuries. What exactly does this mean? There are exchange-traded-funds (ETF) that are designed to track the inverse of the price of Treasuries. Basically, the price of the ETFs move up if Treasury rates move up. There are two funds, one that is based upon the 20-year Treasury Bond (Symbol: TBT), and one that is based upon the 10-year Treasury Bond (Symbol: PST). There are a few reasons why I went this route:

I believe that interest rates are going to rise a lot sometime in the future. Last year when the economy was chugging along (somewhat), the US Government sold US Treasuries at auction to foreign governments to the tune of about $820 Billion. This year, with Obama's stimulus package coming on board, the US government will be trying to sell / issue nearly three times that much (2.4 Trillion). The bottom line is that the buyers of this debt were normally the Chinese, Indians, and Japanese, and they bought the debt with US dollars that the American consumer gave them for TVs and other Walmart crap. Those funds just don't exist anymore.

So, what is going to happen? A flood of US Treasury debt will hit the market (it's already starting), and there won't be enough buyers for the debt. Since it's sold at auction, then the auction will raise the rate on the debt to attract buyers. I.E. rates will go up. Note, this has nothing to do with the Federal Funds rate, which is now at zero. This is different, and is effected by auction sales.

Recently the Treasury bond rates were very low because they were considered a flight to safety in bad economic times. Some short-term bonds were even paying negative equity (you get back less than you deposited). This is and was crazy - caused by super-irrational people. The rates plummeted as everyone flew to the "safety" of the Treasuries. Now, people are beginning to move back into higher-yielding corporate bonds, especially since the big companies are reporting (relatively) good earnings (not losses). This is causing the Treasury rates to rise right now.

The FED is disappointed that the long-term rates are rising, and has mentioned that they might buy long-term Treasuries in order to push the rates down (which is important for the housing market, since the mortgage rates are closely tied to the long-term Treasury bond rates). They would do this by issuing more short-term Treasuries. (HUH?). My Dad (retired CFO from a Wall Street Brokerage House, circa 1990s) thinks this is the craziest idea he's heard of in a long time. I tend to agree. The Fed would be issuing short term debt to go and buy back long-term debt in an attempt to artificially lower long term rates (presumably at the cost of increased short term rates). They are trying to jump-start the mortgage market with even lower rates.

The bottom line is that in 2009, rates will go up, possibly substantially. Firstly, we're going to be saturating the market with increased Treasury debt in 2009. Secondly, as we deficit spend into oblivion, then that will decrease the "credit rating" of the US, causing us to have to pay more to issue debt. Finally, the FED is pummeling the economy with cash, and that will lead to inflation, lots of it, in the coming years. It's only a matter of time - we're in an interest-rate bubble right now, and it cannot sustain itself.

In order to protect and hedge against this, I bought a house with a fixed-rate interest loan (5.75%), and I just bought some of these two ETFs which rise when Treasury yields rise.

For those who don't think that Treasury Bond interest rates will rise, take a look at the two following graphs that show rates going back several years:

10-YEAR:


30-YEAR:


Some additional reading:

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4218210/The-bond-bubble-is-an-accident-waiting-to-happen.html

http://www.marketoracle.co.uk/Article8410.html

http://www.financialsense.com/fsu/editorials/harding/2009/0102.html

http://www.prudentbear.com/index.php/commentary/bearslair?art_id=10150

-Wayne

This is why we have quite a few I bonds...Way ahead of you, Wayne. Bought the first ones four years ago...current yield around 6%. BTW, I don't consider them a good buy today.

[pwd72s]

Originally Posted by Wayne at Pelican Parts

Yup, I bought some about 4-5 years ago too. Not too much, but seemed like something to dabble in at the time.

-Wayne

I'm quite a bit older than you, so we're more heavily into bonds than equities...lucky for us, considering the recent downturn.