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Rising Yields: Trade of the Decade?
10/02/2013 9:00 am EST
Although it is unlikely that you will catch the very bottom of the market, betting against US Treasuries just might turn out to be the "trade of the decade," suggests Nicholas Vardy, editor of Alpha Investor Letter.
Interest rates have been falling for over 30 years. And as an investment, US Treasury bonds have been a one-way bet until May of this year, when Fed chairman Ben Bernanke signaled the eventual beginning of tapering.
The US economy is expanding—and the pace of that expansion is accelerating. Sure, there will be volatile ebbs and flows. But the Fed could be hardly clearer in its communication: it intends to end its bond purchases by mid-2014.
Whether the Fed starts in October, November or later, it's a matter of when and not if. And that will eventually drive up interest rates.
The bottom line? Over the medium term, interest rates are going up. US Treasuries will continue to get hammered as prices collapse. That's why I think a bet against US Treasuries is a one-way bet.
The favored vehicle among retail investors to bet against US Treasuries is through the ProShares UltraShort 20+ Year Treasury (TBT).
TBT tracks daily investment results that correspond to two times the inverse (-2x) of the daily performance of the Barclays US 20+ Year Treasury Bond Index.
TBT is a double-leveraged bet against US Treasuries. Leveraged ETFs have their unexpected problems, thanks to the impact of daily re-setting, which leads to them performing less well than you intuitively think.
That said, TBT has been an extremely terrific way to profit from rising interest rates. So, buy the ProShares UltraShort 20+ Year Treasury and place your stop at $67.00.
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