Shorting the long bond .. how can it go wrong?

[blazespinnaker]

The government can't buy the long bond forever. Seriously.

How could shorting the long bond possibly go wrong? I guess people who buy a house right now and get a 30 year fixed are shorting the long bond.

For those of us who already have houses, though... Seems like a pretty dead simple trade.

Anyone else?

Any suggestions on what the best way to short the long bond is? Also, isn't everyone and their dog going to short the long bond? What impact will this pile on have?

Things are really weird right now. The government is basically giving money away to anyone who wants it via this short.

[cobben]

Re: Shorting the long bond .. how can it go wrong?

I can think of any number of reasons not to, all of them unexpected politically decreed rule changes.

All my instincts scream danger! - stay away!

Buying a few puts on the TLT has of course limited risk and might turn out well on occasion, I mean actually shorting the things, which entails unlimited risk.

[cjppjc]

Re: Shorting the long bond .. how can it go wrong?

I currently own a little PST. I've traded it once before for a small profit. Right now down just a little. If rates rise I'll add to the position. I think along with CEF it could become a core holding.

Looks like a good entry point. if it drops to 50 get out. It looks like a good risk reward imho.

Btw: C1ue says not yet on this idea.

Customize chart - modify settings below and

[Joy]

Re: Shorting the long bond .. how can it go wrong?

There is an implied negative carry in the Long bond trade that will eat at your position. Currently 30 year USTs yield 3.6%. These can be funded in the worst case at 0.25. So the short has a negative carry of close to 3.35%.

BTW I am short USTs but you have be realistic about what you are up against.

[c1ue]

Re: Shorting the long bond .. how can it go wrong?

Blaze,

Those people shorting C this year also probably thought: what could go wrong.

Well, we were shown an example of what can be done:

'Someone' forced a multiple day short squeeze on 'C' last week.

http://seekingalpha.com/article/1266...c?source=yahoo

One of the 'someone's may have been in government:

http://jessescrossroadscafe.blogspot...&max-results=9

Nice timing to help bolster the financials after the FOMC announcement. This has the Larry Summers/Robert Rubin touch.

It would be a good thing indeed if the Obama Adminstration did something meaningful to curb naked short selling and enforce the existing regulations. But if they are doing so for only their favorite companies, then this is not market regulation, it is crony capitalism and insider trading.

Now expand this to Treasuries with their also not insignificant 'failure to deliver' statistics

http://www.nakedcapitalism.com/2008/...epo-fails.html

Treasuries are in such high demand that investors are lending cash for next to nothing to obtain the securities as collateral through so-called repos, which dealers use to finance their holdings. The problem is many parties involved in repos aren’t delivering the bonds because there is no penalty for not doing so, causing “fails” to exceed $5 trillion...

So even if an outright squeeze is not done, the government could simply start assessing penalties for Treasuries not delivered.

That would put a massive short squeeze on itself...and the result would be massive paper losses on any Treasury short along with real possibilities of margin calls further reinforcing this dynamic.

As I've said many times before, I personally would want to see that the government is forced to not intervene in the Treasury market before the short goes in. This could be due to the actions above being taken and then failing (over time if not necessarily immediately), massive inflation causing political backlash, or some other such action which would reassure me that I'm not betting against the biggest boy in town.

[rdgmail]

Re: Shorting the long bond .. how can it go wrong?

In the long run, of course, there's no doubt the long bond will drop sharply. It could of course happen in the short run, too. But why mess with a market that is admittedly rigged? I mean it's one thing when paranoid folks believe that the government (PPT) is unlawfully manipulating equities prices, but it's something else altogether to bet against the Fed when they have expressed an explicit and perfectly legal desire to keep long bond prices high and long term rates low in order to (try to) stimulate the mortgage market and economy.

If you short the long bond market, you are betting that the Fed will be unable to keep long bond prices high, despite it's desire to do so. Now unfortunately, the Fed has a decent chance of failing if and when our dollar suppliers balk at financing the US Debt, so perhaps it's not a bad bet. But if what your betting on is a failure of the Fed to keep long bond prices high, it seems to me that sticking with gold is a better bet. Didn't the Fed keep long bond rates steady for nearly a decade after WWII?

Believe me, I've considered that bet as well, but a rigged market is a rigged market.

[Mashuri]

Re: Shorting the long bond .. how can it go wrong?

The Fed can keep the bond price as low as it likes. When investors start to leave treasuries en masse, I think it would be a safer bet to either short the dollar (what the Fed is sacrificing to keep treasury yields low) or just go long precious metals.

[blazespinnaker]

Re: Shorting the long bond .. how can it go wrong?

The Fed can keep the bond price as low as it likes. When investors start to leave treasuries en masse, I think it would be a safer bet to either short the dollar (what the Fed is sacrificing to keep treasury yields low) or just go long precious metals.

Short the dollar against what, though? The fed can not let the dollar drop forever. Inflation will start creeping in. They can't keep the long bond short forever, to do that would cause hyperinflation.

I'm sorry, precious metals are far more vulnerable to CB manipulation than the long bond. In fact, I think you could probably make a very large bet that the PM will be manipulated.

[DaveBrown42]

Re: Shorting the long bond .. how can it go wrong?

I'm sorry, precious metals are far more vulnerable to CB manipulation than the long bond. In fact, I think you could probably make a very large bet that the PM will be manipulated.

Obviously CBs can manipulate the price of gold if they want to. But will they? I'm not convinced that the CBs care enough about the price of gold to bother manipulating it. Other commodities, sure, there's an incentive to manipulate them; there's a direct economic impact if oil goes to $500 a barrel. But I've seen no indication that the Bernanke Fed is even paying attention to the price of gold.

[Southernguy]

Re: Shorting the long bond .. how can it go wrong?

I had a not so small position in TBT, which I sold for a small profit when FED announced quantitative easing.
Anyway, any gains in long bonds shorting shall be in more or less devalued dollars. You can argue that if bonds fall dollar shall hold because it is the contrary play from FED point of view.
In the not so short term, however, both shall fall.
I think commodities, PMīS, oil and grains are the places to be.
And of course cash, because there are going to be lots of opportunities out there.
I was rereading Steve Keenīs "Roving Cavaliers of debt" and think some dflationary pressures are still existing.

[blazespinnaker]

Re: Shorting the long bond .. how can it go wrong?

Obviously CBs can manipulate the price of gold if they want to. But will they? I'm not convinced that the CBs care enough about the price of gold to bother manipulating it. Other commodities, sure, there's an incentive to manipulate them; there's a direct economic impact if oil goes to $500 a barrel. But I've seen no indication that the Bernanke Fed is even paying attention to the price of gold.

The fed can not manipulate the price of oil. The fed can manipulate the price of gold. They have control over the reserves at the IMF and at Fort Knox.

[jimmygu3]

Re: Shorting the long bond .. how can it go wrong?

The fed can not manipulate the price of oil. The fed can manipulate the price of gold. They have control over the reserves at the IMF and at Fort Knox.

The Fed can't, but the US can, politically and militarily manipulate almost anything, including the price of oil.

[Mashuri]

Re: Shorting the long bond .. how can it go wrong?

Short the dollar against what, though? The fed can not let the dollar drop forever. Inflation will start creeping in. They can't keep the long bond short forever, to do that would cause hyperinflation.

I'm sorry, precious metals are far more vulnerable to CB manipulation than the long bond. In fact, I think you could probably make a very large bet that the PM will be manipulated.

The Feds have the most direct connection to treasuries and, therefore, they are the easiest to manipulate. Easier than gold, oil or anything else. The question really is whether they choose to keep rates low or not. The BOJ demonstrated this control by keeping rates ridiculously low for over a decade. I'm not comfortable taking a short position against a small group of people that, so far, have shown utter determination to keep rates low regardless of what it does to the dollar. When it looks like inflation is starting to worry them, then I'll consider it.

[SJ]

Re: Shorting the long bond .. how can it go wrong?

You guys give the Fed way too much credit to manage interest rates. They absolutely cannot control the long end of the curve except for a brief honeymoon period when they start quantitative easing - that is the period we are in now. After that, look out! The slightest strengthening of the US or UST lender economies (or altenatively, a signifcant spike in US soverign credit risk perception) and we are off to the races. I think smart people should be absolutely shorting long UST's right now. Consider investing in the fund RYJUX.

[Starving Steve]

Re: Shorting the long bond .. how can it go wrong?

The last thing the Fed wants right now is a run on the dollar, so
it is all but guaranteed they are creating a market for bonds (scalping shorts) and selling into the gold market. This can go on for quite a while.

I like oil and energy.... Try to sell oil short; I dare you, and I dare Bernanke. ;)

Just sit-tight with the gold and oil, and expect to sit for years. If you can't sit-tight, you should not be playing this market.