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Saturday, September 28, 2013

Why is Bernanke scared

If you are following my blog closely, you should not be too much surprised by the latest no action decision by the Fed. In the contrast, the whole world seems to be shocked by Bernanke's this decision. Everyone called it unexpected and unprepared. Really? Just a few weeks ago, I said: In the short term it could be very volatile. If indeed the 10 year Treasury moves up to 3%, Bernanke will be scared to death and likely the Fed will do something to calm down the market. This is exactly what has happened: The Treasury quickly approached the critical threshold of 3% prior to the Sep Fed meeting. Bernanke got terrified, and he retreated from his earlier promise to tapering the QE and decided to calm down the market by not tapering. In his post-FOMC press conference, Bernanke acknowledged that he was concerned about the fast increasing bond rate that would impede the recovering housing market.  So what will happen next?

Well, the Treasury rate has since plunged to around 2.63% from 3% within days after the Fed meeting. This is a huge move in such a short timeframe. But I think it will continue to move downward toward the level of 2.5%. This is great news for people who are doing financing with a mortgage that is very sensitive to the Treasury rate. Indeed the mortgage rate is coming down substantially as well these days. I'm glad as I'm waiting for a closing of a house in a couple of months. If you are also looking for a mortgage, take the opportunity as I don't think this historical low rate will last too long. As soon as another hint of tapering QE emerging, the Treasury will be moonshooting again. Ultimately, the bond market will do what it wants to do regardless: to move high, much much much higher lasting for decades!

So I repeat my idea one more time: if the Treasury rate drops to 2.5% again, start to build up positions with shorting long-term bonds. One simple way to do so is to buy the inverse ETF: TBF. This could a huge winning position for decades long. Don't ignore it!

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