Europe Debt Crisis Fails to Sway US Rates

We have been hawkish on interest rates for a very long time now and have been adding on to our Ultra Short Bond position (TBT) and even going short the interest rate futures. While there has been some volatility in the interest rates as many fear that the sovereign debt issues in Europe will ripple through the system just as the mortgage-backed securities did recently. Yet look at the long term chart of the 30-year interest rate. This monthly chart shows that there is definitely upside momentum. It's almost a sure thing that rates are going to test the 5% level. As the European crisis is hardly making a dent (and isn't even noticeable) in this chart, We will be adding to our short position today.

Interest Rates in Play

Stronger than expected employment numbers pushed interest rates higher this morning with the 30-year rate exceeding 4.25% and the 10-year rate pushing to 3.50%. The 30-year rate's next target appears to be 4.43%, recorded exactly one month ago on November 4th. A move above this level could result in a real interest rate surge.

PERCEPTION IS EVERYTHING

One only needs to look at the stunning surge in gold prices to see the potential for a dramatic interest rate move. Gold surged over 20% in less than 2 months, bouncing off the $1,000 level to over $1,200. Although the US Dollar was continually weakening, the strength of the gold move overwhelmed that of the dollar. The gold move grew legs of its own as higher prices always brings in more buyers. With so much money out there and the market very well set on continuing lower interest rates - remember, the FEDERAL RESERVE said that they will keep interest rates low for the foreseeable future - a great many of market participants are positioned according to Fed-Speak. But sometimes, the market is just TOO BIG. Bigger than Ben Bernanke. What happens if rates shoot up 20%? What will the reaction be then?

Will the charge turn to higher rates? What will happen to all the countries and institutions that are heavily invested in intermediate and long-term US bonds? Is this why the government pushed the Accounting Standards Board (FASB) to discontinue mark-to-market accounting for banks? Banks and other institutions heavily invested in longer-dated treasuries would be devastated and another banking crisis would again arise!

AND THEN WHAT??

And then what if China, Saudi Arabia, India and other countries start seeing huge losses on their bond holdings? Will they be sellers or buyers? How much more debt would the government need to bring to market to pay the higher interest rates? ARRGGHHH, how easily things could spin out of control. As you can see, the Federal Reserve and US Government will do everything that they possibly can to keep interest rates low. A surge in interest rates could potentially break the US. It is what many economists fear the most.

The question even came up yesterday in Federal Reserve Chairman Bernanke's reappointment hearings. He was asked about Dr. Roubini's (Dr. Doom)previously correct forecast that the US would having the housing crisis and his current prediction that Federal Reserve actions will result in just what I have been discussing here. Bernanke somewhat dismissed Roubini's forecast as being based on a poor economy while Bernanke was confident that his actions during the recent market meltdown, saved the economy and we are now on the uptick.

It was interesting to note that one Senator reviewed many of Bernanke's previous assurances about the housing crisis and other economic calamities. All the way to the end, Bernanke assured congress that there is no danger of a market collapse. Also interesting was that many of the senators complained of how the Fed and Treasury appears to be in a culture of rewarding failure instead of punishing it. In the case of Bernanke, it was clearly evident that he had failed in his first term to achieve any of the goals he set when he was appointed as Fed Chairman. Yet, congress will again reward failure with a second term. It's clear the the pattern of failure starts with the government. As failures continue to be rewarded and problems get glossed over instead of corrected, I am confident that in the end, interest rates will explode to the upside and the stock markets will collapse as a result.

LEARN HOW TO HEDGE

In the course of this blog, we have discussed methods of playing interest rate movement including ETFs, Futures and Options. A simple way to play rising interest rates with a bit of leverage is with the Ultra Short 20year + bond ETF (TBT). Review earlier writings to learn more about it and what I've been doing with this instrument.



As interest rates again start to look interesting, and we approach the new year, I will again be trading interest rate futures and options and will be discussing my ideas here. You can also see what I am doing in real time by reviewing Interest Rates Trading Results .

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.

LONG TERM RATES HARD TO CALL

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.

Bulls Bears Duke it Out!

Who says that watching the stock market tape isn't exciting? Over the past two days, stock market bulls and bears have been battling for supremecy. The Bears, who have been beaten up badly and working hard to push the market down. The Bulls however, keep making a comeback. This is in light of a big move in interest rates and Fed Chairman Ben Bernanke asserted that interest rates WILL RISE sooner than later.

Shares of TBT, often discussed in this blog, are rallying off of lows on this news.

Ultimately, it could be the course of interest rates that will define the market top or bottom. Certainly the TBT chart shows a very fine bottom in place. As interest rates rise, TBT will also rise. And as has been often discussed in this blog, bonds and stocks have been moving up together. With the end comes, expect both stocks and bonds to fall. TBT though goes up when bonds fall. Consider speaking to your investment adviser about adding such an instrument to your portfolio. Experts fear that the Federal Reserve will not drain liquidity quickly enough to limit inflation. TBT could be an ideal way to protect yourself against rising rates.

Ultra Short Bond ETF

The Julian Robertson interview on CNBC reminded me of how much I wanted to be short the bonds but with so much government intervention, I have been shying away except in the core portfolio. I'm not convinced that rates have hit a low point and a big move down in stocks is likely to push rates lower as the fear factor enters into the market. But the risk that China stops buying our bonds is a real fear. And, once the Federal Reserve stops propping up bond prices, who knows what might happen.

I have been out of TBT in my personal account until just now however in the core portfolio, established at the beginning of the year, our TBT position is up more than 21%!

TBT is the ultra short 20 year + bond position. For every 1% bonds move down, this instrument moves up 2%.