Treasuries Back in Uptend $TLT $ZROZ

Check out this chart from StockCharts.com for ZROZ

What a beautiful chart. Can you believe there are people who believe this is going lower??

Look how it bounced back in a hurry. I see it taking out the 2012 high.

Long Bond Back in Uptrend?

Interest Rates Don't "Interest" Momentum Investors?

Mentioned in our earlier post about interest rates:

The Fed continues to "taper" and yet interest rates keep falling. Maybe there's something wrong with everyone's theories about quantitative easing?

It goes to show how few people pay attention to technicals. People are massively short all three of those interest rate durations. Don't they like momentum?

One commenter replied,

One of the fastest ways to go broke is following "technical" ( sounds scientific, doesn't it? ) charts.

But a more astute commenter pointed out,

I don't use technical analysis either, but I took the post to be less about TA than about double standards.

Normally when a security has strong momentum, people find (invent?) technical reasons to buy it. Treasurys have lots of momentum but sentiment is still negative and most people don't care about the strong technicals. Whether or not TA works, the disconnect is telling.

Interest Rates Keep Fallling

The Fed continues to "taper" and yet interest rates keep falling. Maybe there's something wrong with everyone's theories about quantitative easing?

The 10 year bond interest rate, the 30 year bond interest rate, and the zero coupon treasury ETF (the bonds, not the rate).

A correspondent writes in,

10-Year: Bearish chart, with one quick chance at S at 25 area (prior lows for Horizontal Support), 24 for the width of the just completed flat flag and the measured move of the length of the leg before that flag subtracted from the top of that flag, 20 on the double-top measurement if it gets to 24, then 17 for the crook of the prior low, prior low at 16, and the test of bottom at 14 – 15.

30-Year: Same formation as the 10, but it’s farther along already so, assuming it doesn’t turn north here at UTS, then its 31- 32 on the double-top measurement, then 28-29 on the prior low, and 25-27 on the test of the bottom.

ZROZ – here (2B target); 102-103, 107-110, 112, 115, all HR.

It goes to show how few people pay attention to technicals. People are massively short all three of those interest rate durations. Don't they like momentum?

The Little Bond That Could $ZROZ

Check out this chart from StockCharts.com for ZROZ

Something Deflationary this Way Comes

From a very important WSJ article "Panel Floats Idea of U.S. 'Century' Bonds"- published on Friday afternoon, natch:

"Wall Street is pushing the U.S. government to lock in low interest rates for the next few decades by issuing ultralong bonds that would mature in 40, 50 or even 100 years."

Aha! Remember my deflationary thesis.

You cannot inflate away really short term debt. "Inflating debt away" is just fancy talk for theft. The only way you can steal from a creditor is if they have no choice. But creditors - Treasury buyers - who have lent money on a very short term basis do have a choice. Every time the Treasury rolls over its debt, these creditors have the opportunity to demand higher yields. If the Fed is inflating, creditors will demand higher yields to compensate!

I have argued that deflation would suit the government's purposes best. Look how low the yield on the 30-year was during the crash in fall 2008. During an equities selloff, they could sell tons of long term Treasurys at low yields! Their biggest priority will be selling lots of long term Treasurys, so the yield won't necessarily spike so low this time.

But, lengthening the maturities to "40, 50, or even 100 years"? That would be a masterstroke. That is downright greedy of them! I hope they do it.

It would be easier to make money if the Fed would follow its own rational self interest, which is to preserve the financial strength of the empire.

In his speech last week called "The Economic Outlook and Macroeconomic Policy", good ol' Benny Bernanke tossed us another deflationary morsel:

"Moreover, diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. In a vicious circle, high and rising interest rates would cause debt-service payments on the federal debt to grow even faster, causing further increases in the debt-to-GDP ratio and making fiscal adjustment all the more difficult."

Double aha! That is what I have been saying for a year!

If the Federal Reserve and Treasury were clever enough to implement this deflationary scheme, one place to look for clues would be the Schedules of Federal Debt published by the Treasury. As of the January 31, 2011 report, the marketable treasury bills outstanding were $1.76 trillion - roughly the same as six months ago. The treasury notes, which are longer maturities than bills, have increased from not quite $5 trillion to $5.67 trillion. And the treasury bonds have increased from $816 billion to $900 billion.

Triple aha! Over the past six months, they are lengthened - at a rather slow pace - the average maturity of the federal debt.

How could we play a return to deflation? One obvious choice is TLT - the long term treasury bond ETF. Implied volatility is low and thus the calls are cheap. Another idea is to short or buy puts on TBT, the ultrashort Treasury ETF. This is attractive because all of the ultrashort ETFs are terminally defective. Third idea would be to buy ZROZ, the zero coupon treasury (very long duration) ETF which would benefit the most from falling interest rates.

Treasury Bears Are Wrong - They Need to Look Closer at the Fed's Motives and Opportunities

As we discussed last week, hedge fund managers are crowded short Treasurys. They just despise them. David Rosenberg and I are the only people on the planet who are bullish. Rosie isn't even all that bullish - he's not calling for yields to get cut in half like I am - he's just not apocalyptically bearish. (I have been beating my pro-Treasuries drum for months.)

Comes now an asset manager with a typical article saying "Don't Fight the Fed - Short U.S. Long Bonds". This time I have to respond. The crux of his argument is that,

"central bankers will be doing everything within their power to spark 'manageable' price inflation because of all the debt they've issued. We've all heard the old Wall Street saw 'Don't fight the Fed.' This makes it particularly important to realize that the Fed wants inflation. Some would argue that they need inflation. This certainly applies to all central banks and sovereign debt around the globe."

This is certainly the consensus opinion, but it is totally wrong. People who hold this view are missing three key things: (i) they in a crowded trade with barely any opposition, and (ii) inflation would be a disaster for the Treasury, and (iii) deflation would suit Treasury's purposes much better.

As evidence for (i), we can take an admission from this very asset manager,

"It's interesting to note that the commercial interest in Treasurys from the COT report is pointing to extremely bearish sentiment on bonds. In fact, save for one month in 2005, it's at the most bearish level since 1993."

However, he justifies his complacency with the typical Treasury bears' tired argument about "inflating the debt away,"

The U.S. has increased its total debt 32% in two years. That's a lot of debt that must be inflated into submission.

Unfortunately, these Treasury bears are just not paying attention to the term structure of the debt, which brings me to (ii): you cannot inflate away really short term debt. You cannot! I defy anyone to do it!

"Inflating debt away" is just fancy talk for theft. The only way you can steal from a creditor is if they have no choice. But creditors - Treasury buyers - who have lent money on a very short term basis do have a choice. Every time the Treasury rolls over its debt, these creditors have the opportunity to demand higher yields. If the Fed is inflating, creditors will demand higher yields to compensate!

This brings me to argument (iii): right now, deflation would suit the Fed's purposes best. Look how low the yield on the 30-year was during the crash. During an equities selloff, they could sell tons of long term Treasurys at low yields! Their biggest priority will be selling lots of long term Treasurys, so the yield won't necessarily spike so low this time.

What's hilarious is that this is going to be paid for by people who are short Treasurys and long equities, like our asset manager friend, who says

Relative to the yield on the 10-year T-note, stocks are very fairly priced. We think a long stock index position has less risk than Treasurys. 

Really? Don't you see how easily equity investors could be stampeded into Treasurys? Not only that, but the Treasury has a prior claim on equities. They could just raise corporate taxes.

So what would you expect to see if I was right? First, getting rid of the special liquidity programs and quantitative easing - which they have done. The asset manager admits that tightening has been happening:

And while this metric has actually reached a negative annual growth rate recently, the U.S. created so much money that there is still a very real possibility that the Fed moves too slowly to reduce MZM in time to eradicate inflationary price pressure.

When the market starts crashing this summer, I will be interested in buying TLT and ZROZ.