I'm Buying TBT For the Long-Term. Here's Why...September 28, 2012 @ 11:06 AM EST
The following premium content was originally published on the PRO Trader Service on Friday, 28-Sept at 7:16 am
I want to clarify my thoughts and intentions regarding my TBT position (a bet that interest rates will rise significantly in the future).
Interest rates have fallen dramatically. That statement refers not just to the past few weeks or months. It also doesn't apply to only the past few years since "Helicopter Ben" began ZIRP (Zero Interest Rate Policy).
No, that statement actually applies to the past several decades. Yes, decades.
Let's look at mortgage rates for example. Back in 1981 the rate on 30-year FRM (Fixed Rate Mortgages) was about 18%. That's 1.5% per month. The 30-year FRM rate was roughly 3.5% before Ben announced the new Fed program. Rates have only fallen slightly in the past several days but are now about 3.375% or less. The 15-year rate is approximately 2.875%.
So 31 years ago rates were about 18% and now they are about (fudging here) 3%.
U.S treasuries have seen rates move in a similar fashion. As a further data point for reference note that the Prime Rate was over 21% back then and is now in that same 3% area.
It is my opinion (not fact, opinion) that the next "BIG" move in rates is up, not down. The reasons include Fed induced inflation and increased economic activity. We're talking years here, not days or weeks or even months.
To be clear, I am building a TBT position for a long-term play. I intend for it to be a core position. Since rates will clearly fluctuate in the short-term I will be looking to trade against this core position. I may do this by buying and/or selling shares. Also, I will likely, from time to time, trade TBT options against my base position.
As to my recent purchase, I bought with the intention to buy puts against the position after further gains were registered. An outright sale was and is also a possibility. For the moment it looks as if the rally may be delayed. That's OK with me. If the TBT's fall significantly I will look to buy some more.
ProShares UltraShort 20+Year Treasury - Last 12 Month
Turning to the stock market, I believe its importance lies it what it tells us about the market environment in which we find ourselves.
We are in the midst of a battle between the forces of "the current economic reality" and those of "central banker induced liquidity". While this again is opinion, it seems to me that the global economy is rolling over and that viewed in an isolated fashion such a situation would call for reduced corporate revenues and earnings estimates. And that should lead to declining equity prices.
This downward pressure is being resisted by the upward push of the liquidity induced "Risk On" trade. The central bankers seem to be clearly hoping to buy enough time for the political class to finally seriously address the global problems and set things on "the right path" toward renewed economic growth.
The question is: who's likely to win this battle?
I have my opinion but nothing is absolute and things rarely move in an uninterrupted straight line.
Fun game ain't it?
Have a good one...
Manager – PRO Trader Service
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