Long Bond

June 12th, 2009 6:13 pm mylifemytrade Leave a comment Go to comments

I want to draw people’s attention to the fact that are so many plays which offer such sweet risk/reward as compared to the IWMs, QQQQs, SPYs, FAZs etc etc. Long bond play is one of them. I am not suggesting and won’t even try to pick if we are going to see hyperinflation or deflation – that will be very very arrogant of me. Hundreds of economists out there are divided and I don’t even want to suggest that I am better than them.

What I do know is the Ben is not going to let the dollar go down the toilet so easily and that the TLT has overshot on the downside. Which means that TBT – the double inverse has gone parabolic. One of my favorite plays is to short these inverse ETFs when they go parabolic. If you look at TLT’s chart, there are two gaps to be filled. I expect the first gap (highlighted in green) to be filled by June Opex, which should take TBT down to $53-$54 mark. I was fortunate enough to get June and July TBT puts when TBT was $59+. I closed ou my June puts yesterday – Thursday before opex is the last day when I hold front month contracts.

On a more longer term. I expect the 2nd gap (highlighted in salmon color) to also get filled by end of June or early July. That should take TBT down to $47-$48 region. I am holding quite a few July TBT puts at varying strikes. I got into these when TBT was $59+. I will look to add more whenever TBT rips.

As always if you found this useful, please feel free to share some love.

2009-06-12-long-bond

Categories: Technical Analysis Tags: , ,


  • Peasant
    Just curious why you buy TBT puts versus TLT calls. Are they cheaper and therefore offer better risk/reward ratios?

    The 'inflationary bear for equity markets' scenario that I posted on Mole's site is not my own idea. I heard it in a speech from a chief market strategist of a firm that manages close to $1 trillion and it makes more sense to me than the ideas that conspiracy-theorists Karl Deninger and ZeroHedge have posted. Not that those guys are wrong, they very well could be right but the goal is to figure out what the market is going to do and play the trend. Don't make bets based on principle.

    If the Fed insists on disallowing open-market action in the bond market through their "quantitative easing" then the dollar will continue to go down. A falling dollar will also make what little we produce in this country more attractive to the likes of Brazil, China, and India. I'm looking for companies that fit this mold to invest in long-term like CNH,CAT, DE, MON, POT, BG, TNH, FCX but I will keep those investments small until I see evidence that those economies can decouple from our economy.

    BTW, you've made some good calls lately. Nice work!
  • It is not obvious that shorting TBT is better than going long TLT... This is same analogy as "is shorting SKF at 250 (back in March 1st week) better than going long XLF". I offer two reasons:
    - if I have OTM options, a bigger $$ decline (not %... but big absolute $$ decline) makes it very attractive to short the 2x inverse rather than go long the underlying
    - TLT could chop up and down AND TBT would still lose value because of the decay associated with leveraged ETFs (See http://www.mylifemytrade.com/2009/05/understand... for an extreme example)
  • mral
    i don't know anything about stocks (i'm a bond trader) but i agree that bonds are due for a rally. we are closer to deflation than inflation and the fed will keep rates low through 2010 imo. seasonally, we are entering a very bullish period for bonds. i think 5 of last 6 years have seen yields making highs for the year in june. however, i follow technical analysis on the underlying cash bonds & futures and i wouldn't be surprised by another sell-off before bonds rally hard.
  • Thank you for your comment. I am mainly an equities and equity futures trader. I don't know much about bonds.. I was looking at the TNX chart. And it seemed like TNX would retrace a decent amount after touching 40, which would lead to gap fills on TLT. This coupled with my prior experience of playing downside on inverse leveraged EFTs after they have gone parabolic made suggest this TBT puts play.

    However what you seem to suggest is that there would be one more selloff in the bonds before they rally.

    What instruments and tickers do you track for the bond market. Also usually bonds and equities share inverse relationship... however, past few weeks have hinted at a selloff in the equities whenever bonds have feared selloff.

    can you share some more about what you see coming in the next few days and weeks in the bond market.

    also, any good book that you can suggest to educate myself about bond markets.
  • mral
    sorry, i the only bond books i have read are about specific things - e.g. the treasury bond basis by fabozzi. i am sure there are basic books out there but i have never looked.

    the instruments i follow closely (apart from the on-the-run cash bonds) are the 10yr & 30yr treasury future. the tickers are tyu9 (sept 10yr future) and usu9 (the sept 30yr future). the ONLY one that is relevant to tlt & tbt is usu9.

    the market did good work on thur & fri, but stalled exactly at resistance. therefore, the burden of proof is still on the bulls - not the bears.

    your observation about equities & bonds is correct. we are not trading inversely as much as we were. what this is all about is the $. the worst case for the fed is if yields rise AND stocks fall. this is what i call the "sell america" trade and would be disastrous.
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