Waiting to Short Treasuries

Marie sent: “You wrote in late December that you were looking to short Treasuries. Are you still?”

Yes.

Treasury yields firmed last week, which means prices dropped, which means short positions rose. Short positions gained a lot in the two weeks ended last Friday.

Last week alone saw around $135 billion in debt sold, a sharp reminder of the exploding federal deficit. The Fed did not show a timetable for buying government debt as a way to lower mortgage rates, and that led to Treasuries selling off last Wednesday and Thursday.

It didn’t help when new Treasury Secretary Tim Geithner said before his confirmation that China is manipulating its currency. The U.S. needs China to buy Treasuries, and if an angered China stops doing so, then Treasury prices will fall and rates will move higher.

Look at the iShares 20+Year T-Bond ETF (TLT). It rose from $92 in early November to $120 at the end of December. In the last month, it has fallen back to $105 with an RSI signaling oversold. Chartists also find that it’s etching out a falling wedge pattern and has retraced 50%-62% of its prior advance. The RSI, falling wedge, and retracement measurements taken together make the recent drop look like a correction within a bigger rising trend. If TLT is due to resume its former uptrend, then now is not a good time to short Treasuries.

Backing up that notion, the Geithner/China spat over currency manipulation is more feather ruffling than anything. China is not going to change its national policy of buying U.S. Treasury debt because of off-the-cuff comments by an incoming Treasury Secretary. More important than that being a silly reason to change anything is that China doesn’t want to kill its best customer by crimping the customer’s ability to raise money. Whether China ultimately concludes that the debtor U.S. is on its way to insolvency, and that lending too much to the debtor is a bad idea, is another issue — and beyond the scope of this trade.

Long-term pressures continue indicating higher yields and lower prices (thus a compelling case to short), but the wildcard of what the Fed will do makes it hard to short now. If the Fed goes for broke with a massive Treasury buying spree, Treasury prices could rise in a hurry.

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