Playing Against Treasuries, But Small

Greeting friends, to my office, come in. And witness the latest plans from the 9th floor with your own eyes.

The commodity depreciation monster has been slain; Bernanke burned out its eyes with his mighty blunt, but urinated on it.

However, the Fed’s actions do not necessarily guarantee that commodities are back “in play.” Specifically, he’s just hiding dollars overseas so that Euro banks are free to spend all of their euros in their markets. It’s a silly game, but having some green pieces of cotton in their vaults lets them worry about money less.

We could still see the euro weaken against the dollar from here, which would still result in lower commodity prices.

What has really changed is the prospect for another plunge. It is most unlikely, with the various central banks of the world looking to shore up Europe, that we go back to an across the board sell off. That does not mean we go higher. It just means we don’t go to $0.

It also means that safe haven plays are at extreme risk. If Europe is not going to disintegrate before our eyes, then why hold half your net worth in gold.

Or treasuries…

Which is why today, and with EXTREME CAUTION, I initiated a very small short of TMF, barely 2% of my assets. This is a highly leveraged bull ETF of long term treasury yields.

I would have preferred to short TYD, which is a highly leveraged ETF of shorter term maturity debt (7-10 years), but I could not find any. So, I will keep a lookout for later, while maintaining this small exposure.

In addition to the obvious risk from further fallout from abroad pushing our Treasuries higher, there is a second danger.

The Fed and Treasury have already stated they intend to roll over maturing debt into long term positions. If they do so too aggressively, then even in spite of safe haven investors selling out of treasuries, I could still lose a great deal of this position thanks to the government forcing long term yields lower.

Basically, this is a very dangerous position and I don’t recommend you do anything in size. I am expecting that the Fed would like to see outward maturing debt with higher yields before they buy, so they get bang for their buck. But even if I’m right and this is a turning point in treasuries, as I said, the stuff I’m holding could still track higher, pushing yields lower along with this 2% of my account.

The strategy is simple. If treasuries do reverse lower, I’ll be up small. Depending on where we are then, I’ll add, pass or cover. If treasuries go higher, this position is so small that I can add more or cover for a small loss.

But the position itself, being small, is controlled. No matter what happens, I live. That is very important with this sort of thing.

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