Treasury Bonds
Monday, October 20th, 2008

The yield on the 10 year Treasury Bond has been erratic at best, but that is to be expected in the current credit market crisis. As you can see on the chart, when the fear factor rose the rush to own treasury bonds sent the yield to a low near 3.4%. The bailout news pushed yields back near the 3.8% mark and then a retest of the 3.4% level as fear escalated and climaxed. The rally in equities last week sent the yield higher as money moved to higher yielding venues. Thus, the yield pushed back near the 4% mark. In the process of the news and emotions pushing money into and out of treasury bonds we created a double bottom with a breakout and a retest of the break. Technically the chart is showing an above average probability that rates will rise near term. The short term target is 4.3% with the likelihood of a move back near the 5% mark.



Money is rotating out of treasury bonds and finding other plays. The key factor in this move is the bailout and capital infusion by the central banks worldwide to strengthen the credit markets. This has created a new game of credit arbitrage for hedge funds and institutional investors. I look for money to continue to flow out of treasury bonds into other areas to capitalize on the opportunities created. In fact being short treasury bonds as a hedge is a prudent play.

A play that I used several times is to be short the 10 year Treasury bond. ProShares UltraShort 7-10 Treasury Fund (PST), the fund is short the treasury bonds. The fund will rise along with the yield. Thus, tracking the yield on the 10 year Treasury. Because the fund is leveraged you need to take that risk factor into account when putting money at risk. Adjusting the amount invested as well as accounting for the volatility is vital. The retest of the $67.50 breakout held on Friday and now looks to move towards a target of $71.60. A break below $67.45 would negate the breakout. This is worth putting on the watch list for a potential play.