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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.
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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.
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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.
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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.