Tuesday, November 10, 2009

Short Bond ETF Ready to Surge?

Over the past year, I have been discussing the Ultra Short 20+ Bond ETF as one way to profit from rising long-term interest rates. While the US Treasury's massive, billion dollar plus auctions continue to attract more than adequate demand, rates appear to be creeping up from low levels hit when it appeared that the financial world would be quickly coming to an end. Reviewing the chart pattern, it appears that the ETF, ticker symbol TBT, is poised to break through previous resistance.


Rates have stayed low for an extended period of time. It all starts with the Federal Reserve who is keeping the rates that they charge at 0% to 0.25%. Banks have been profitable lately but it's not due to retail business, imagine that you can receive money for free and then turn around and invest it at 2% to 4% in riskless Treasuries. Why take a risk? It's easy money. Can you imagine the million dollar bonuses for doing this? Unfortunately, none of us can take advantage of 0% interest rates. Only the banks have this privilege.

But the mere fact that the Fed continues to hold rates down to 0%, even though economists have reviewed recent market data and have determined that the recession is over. Of course, if you are able to manipulate data the way the government can, any imaginable outcome is possible. But is it the reality?

The Federal Reserve lowered interest rates to 0% as an emergency measure to prevent the total collapse of the banking system. Now that the world has supposedly recovered and businesses along with the stock market are booming, why are we still at emergency level interest rates? It's a good question and one that can't be ignored, especially when we are considering long-term interest rates. These rates react to growth and strength along with inflationary concerns. With short term rates at all time lows, it's obvious that there is little to no growth or strength in our economy. But the longer the Federal Reserve keeps interest rates at these low levels, it could cause inflation down the road. Many believe this and longer-termed interest rates rise when this sentiment is stronger.

Unfortunately, all of the world's best economists in government and banks couldn't see the mess that they were creating so how can a blog writer such as myself ever think that I can figure out the future? I can't. What I can say though is that the chart pattern of TBT is very indicative of having formed a solid base and the trading instrument appears that it will break out. Should it run through the 49 price level, I've got a feeling it could hit 55 over the short run. But if interest rates ever do take off as a result of inflationary pressures caused by the Fed and Treasury, you just might be able to salvage your retirement with this one.

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