Rates Rise Above 3%

Interest rates on 10-year treasuries went above 3% today on a day where the equity markets were flat.  We’re now back above where we were when the Fed announced they were going to buy everything in sight to get rates down.  That day (March 18th), interest rates went to 2.5% from 3%.  In one day!  That’s been reversed and either we’re going higher or the Fed will have to make another announcement they will be buying more treasuries and mortgage bonds.   You can see the fall in rates and the reversal from the picture below.


It’s really fascinating to watch the Fed trying to push rates down and the market that’s pushing them up.  Where’s fair value?  2%, 4%?  It’s hard to say.  Instead of predicting that, the easiest thing to do is simply trade the trend.  Right now, the trend is up.  Rates appear to be going higher.  This is despite unemployment rising, a flu that could scare the economy to an even slower pace, a negative GDP (reported tomorrow morning), and a savings rate going up every month.  Rates should be falling.  I think this is what happens when bubbles are created.  Treasuries are a bubble.  Maybe they should be going up and rates down due to the economy but because they were so overbought over the past few months, they are now being liquidated and profits are being taken.  The iShares Barclays 20- Year Treasury Bond (TLT) went up over 30% in just two months late in 2008.  That’s a huge move in any bond.  Since the peak in late December, TLT is now down 18% and looks to go lower.  You can short TLT or you can buy TBT which gets you short treasuries (betting on higher rates).  Or you can use DXKSX, which I own.  The next level appears to be 3.3% on the upside and then maybe even 4% which may be a stretch given all the economic headwinds.

Bubbles burst and there’s nothing to stop it.  The tech bubble of the late 1990s burst in early 2000.  Even though it was logical to think those stocks would continue to rise, they didn’t.  There was simply nobody left to buy.  The technology was fine.  We all use it today.  Great companies.  But, there was too much supply (remember all the IPOs) and not enough demand.  That will be the case with treasuries, even with the Fed and other governments still buying them.

This post published at www.karleggerss.com 


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2 Responses to “Rates Rise Above 3%”

  1. 1 Patrick April 28, 2009 at 4:36 pm

    I noticed that there were about 49,000 May 99 put contracts (when volume was only 5k) traded on TLT today. Seems like a lot even though these are near in the money. If TLT is a good shorting opportunity, does that mean put options on TLT would be an opportunity as well. Unless hedged, it could be risky.

    • 2 keggerss April 28, 2009 at 4:56 pm

      Yes. I’d rather use the put because you obviously are not using as much of your capital. Good observation to notice the options. That’s what the pros are watching.

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