US Treasury is in a parabolic move

The bond king, Bill Gross, is one of the smartest guys in the world most famous for his enormous successful track record in bond investment over 4 decades. He has called the end of the 30 years supper bull run of government bonds a couple of years ago. He also called a higher interest rate moving forward. I obviously do not dare to argue with such a smart guy about bond investment and totally agree with him that putting money into the government bonds for long-term is almost like a suicide. Sooner or later, the interest rate for sure will go up, which will kill the long-term bond investment. But I disagreed with his call in terms of the timing, especially I didn’t believe the US interest rate could go up immediately. I made the call over 2 years ago when the Treasury rate moved up quite a bit at the time there was much expectation that the Fed rate would go up(with declining Treasury bonds). Here is what I said: While in the long run, the Treasury bonds will definitely go further down, a lot more down, the question is: will it simply go down from here without looking back? I highly doubt…… I think it is highly likely that the Treasury bonds will bounce back strongly in the near term and the interest rate will come down from the moon soon. If this is indeed the case, then a logic speculation is to long the Treasury bond.  It turned out I have been right till now. Following the Brexit, the situation has become even worse and the Treasury rate has plunged to all time low (below 1.4%) with Treasury itself moving further up. Believe or not, I think the Treasury may further go down from there in the longer term due to 2 major reasons: for one, I don’t believe the US economy, although seemingly in a much better shape than other countries around the world, is strong enough for a high interest rate. If so, the much stronger US$ plus the higher business costs will for sure significantly drag down the US economy; secondly, when more and more countries are moving towards negative interest rates, the US bonds still with positive interest rate, although historically low, are becoming more and more attractive for foreign bond investors. The demand for the US government bonds may likely further increase that will accordingly further push down the bond yields. Not to mention the potential recession down the road which I believe is becoming more and more likely. If that happens, look for more QEs from the Fed. We may eventually also have to move to a negative interest rate environment. Sounds crazy for now but it is another topic for future.

 

Having said that, the rapid up move of the US bonds in the past 2 weeks was a bit too fast too soon and I think in the very short term it is a bit parabolic and needs to come down first. The ETF for 20+ Treasury bonds (TLT) has jumped to $143 a couple of days ago. I think very likely it will go down to test its 50 DMA around $135 in the next few days. The best bet for this move is to buy the leveraged inverse ETF, TBT. In anticipating this move, I bought TBT last Friday and it is already moving in the right direction. I think there are more gains in the days ahead. But please note, this is just for a very short term trade aiming for a quick profit. Longer term, TBT will likely go much down with up moving TLT.