A TBT Trade

I’ve long advocated a trade in the TBT. The thesis has been straightforward: over the long-term, money will have to come out of Treasuries. In times of fear, investors buy Treasuries because it’s the safest security, even though interest payments are very, very low. At some point, risk appetite will come back, and those investors will sell their Treasuries. The TBT is short Treasuries.

This is a long-term trade. The issue is, of course, that in the short term, this trade has a lot of variability. So let me be upfront, this trade is not for the beginner or the part-time player. This is really for someone that takes the time to understand what’s going on in Treasuries.

In the short term, the TBT should see a lot of variability. Given the market’s tremendous run since March, there has been growing fear of a correction. If that occurs, then the appetite for risk will recede and investors will go back into Treasuries. This has already occurred a somewhat, and the TBT, which was as high as the high $50s, is now trading at $46. A run up into the end of the year will cause the TBT to rise, a fall in markets will cause the TBT to decline.

Given that, the TBT can also become a trading vehicle. Again, this is not for novice players, be advised.

If you watch the TBT, it has, in recent months, fallen immediately after the sale of the 4-week Treasury. Then it has risen until the 30 year is sold, and has immediately retreated as soon as the results of the 30-year Treasury auction has been announced. That’s because people expect demand for short term Treasuries to remain high. So the short has performed well, and the TBT retreats after the 4-week Treasury sells well. Then the possibility that longer term Treasuries will not sell well infects the markets, and the TBT rises. In recent weeks, this fear has been unfounded. Fear of a correction has actually caused the longer term Treasuries to sell well. As a result, the TBT retreats after positive 30-year results have been announced.

So here’s the short-term trade hypothesis: buy the TBT after the 4-week auction, and sell just before the 30-year auction. Again, this is for active traders who understand the risk, not for novices. As always, put a stop loss in somewhere around your acquisition price to prevent pain from sudden downward moves.

I am currently long the TBT.