Sorry! Couldn’t resist checking on adorable TBT as I studied.
As we all know, TBT tracks the inverse of long-term bond prices. And the inverse of a bond’s price is its yield. So we can see TBT tracks TYX, the 30-year bond rate, step by step. So far, treasury prices have been going up and as far as I know, the 30-year yield is the lowest in at least 10 years, dipping below 4% today. And will be going further down if nothing dramatic happens.
The interesting thing is that, while yes, treasuries are the safe haven in deflationary environments, their percieved safety still lies in the US govt’s credit-worthiness. And as we all know the US govt has been, and will continue to be, issuing debt to pay for the bailouts and government credit swaps of this decade.
A position in TBT can be used to play two ways: to, with some certainty, ride the bond price decreases as the world economy recovers in the medium term (and with it, demand for forms of investment other than treasuries), and also be used to benefit from any credit events/inflation fighting situations down the road where the Fed might find itself under. Overall an above-normal return from my understanding of the situation.
The dates to watch for this play would be the Fed announcements coming up on 16th Dec and 27th Jan where the prices will definitely jump.
Would be great to hear your opinions on this. Good night!
[edit] an informative read on why you should consider playing the Treasury’s debt binge would be The Treasury Department is Choking on Debt, But You Don’t Have To from moneymorning.com. They recommend RYJUX though, which is a ‘normal’ inverse bond etf compared to the ‘ultrashort’ TBT.
The yield spread is able to predict the probability of recessions fairly accurately. More specifically, when there is an inverted yield curve (the long term yield is lower than the short term yield), there will be a high probability of recession after the next four quarters. So as long as the yield curve is still inverted, chances of recovery are dismal. But then again, it will be interesting to test such a hypothesis on a country that runs on exchange rate policy like Singapore. So far, the predictability has been fairly accurate for most first world countries as well as developing countries. If you could provide me with substantial data on the historical 3 month bond yields and 10 year bond yields, I can run this quickly through my probit models.