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