As I stated over a month ago, watch for the 20-85 downcross on the TLT (long-dated US Treasury ETF) chart….that down-cross occurred about a week after my illustrated scenario (which was not meant to be an accurate forecast at the time). Once that cross occured, it didn’t take me long to get into some TBT (shorts long-dated US Treasuries) calls on the options market.
Sure enough, most of my BIGGEST gains the past 7 days or so have come on the TBT calls….I sold some off for triple-digit gains….and kept some too….also took part of the profits and rolled them over into longer dated, slightly more out of the money calls to save on premiums and at the same time, be in position for further big gains.
Now, some options experts would tell me that I’m living dangerously by buying out of the money calls to save premium….but if they were as good at reading charts as I am, they might understand my “madness.”
As of this date (a Saturday in mid-November), we have the TLT resting on its 200-day line, and well under the 20-85 downcross. I’m watching to see if the 200-day line gives way? If so, then I think this downtrend continues.
So, what is going on with the long-dated Treasuries? In short, there are two major themes at play here, I think. One is the the FED’s QE2 bond-buying program is concentrating on shorter-term bonds as compared to the 30 year ones (this was actually stated in the Fed’s policy). Second, we have the Chinese, a major buyer of our bonds, moving away from US Treasuries and more into hard assets like commodities. So, with two major buyers moving away from the long-dated treasuries, there is great potential for the long bonds to continue with a rising yield (and fall in premium value).
However, there appears to be a third reason here: lately, asset prices of everything in our country seem to be rising. In other words, inflation is creeping into the US, despite Fed observations to the contrary. The weak dollar policy of the FED has caused a spike in gasoline and every day staples that rely on input costs of basic materials which are rising in value. When inflation creeps in, it causes the long end of the yield curve to rise…and that is a phenomenon we are beginning to see, despite FED attempts to keep treasury prices down on the 10-year note…and somewhat on the 30-year bond.