It is not a surprise that any time when fear returns to the market, investors sell stocks and flock to US Treasuries for safe heaven. When bonds rally, yields go down as they're willing to accept lower interest rates. That's exactly what we have seen in the past 7 days. If you haven't understand me from posts yet, you should that I mostly like to play contrary to the market, unless the story is solid.
The yield on 10-year note has fallen from 3.85% to 3.6% in past seven days as fear has ramped up (check out VIX). I think now it is time to bet the other way. Morgan Stanley believes that by the end of 2010, yields on 10-year note will rise to 4.5% and I fully agree. Banks have been paying back TARP and Fed's commentary going forward will continue to raise questions about how and when to start pulling out liquidity measures such as backstopping banks' losses and 0% interest policy.
Attached is a daily chart of TLT which tracks US 20-year bond performance. It is not there yet, but it is real close to hitting the upper band of well-defined resistance line. I think it will stall there and go right back down. TBT is 2x inverse of TLT. I like to play long TBT with the following calendar spread:
- Buy to open Mar $50 strike calls
- Sell to open Feb $50 strike calls
The whole trade can be done for a net debit of $0.39 as of this writing. This creates a range of $47.50 and $52.50.
Good luck!
