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.

Rates, TBT Pop As 30-Year Auction Lags

US interest rates opened higher this morning after plummetting yesterday in response to a strong 10-year auction. We discussed TBT, the ProShares ultra short 20+ Treasury play as a great way to take advantage of this move.

Later, the 30-year auction results came in worse than the 10-year auction yesterday. Bid-to-cover for the $11 billion offering was 2.36. 67.88% of the bids were accepted at the high rate of 4.303. Thirty-year rates were trading at 4.32% around 1:25 cdt. TBT is up nearly $2 at 50.20 at this hour.

Expect the long-end rates to continue rising while the short-end will benefit from an expected flight-to-quality that should occur as the market continues to trend lower.

If you don't have the stomach for the fast-paced futures markets, TBT, which is traded like a stock, can provide you with a way to take advantage of rising rates. TBT's price moves inversely to the bond price rising 2% for every 1% that the bond price falls.