Bond Bubble? Perhaps – Initiating Position in (TBT)

A speculative short of 5% or 10% synthetic position of the 2x Inverse of the Barclays Aggregate 20+ Year Bonds with ticker symbol (TBT) has been included in the portfolio.   We are currently seeing some of the highest bond prices and lowest yields since March of 2009 which is signaling a much more detrimental environment then we are currently experiencing.   We will keep a watchful eye on this position and cut or add if necessary.

Rates on 30-Year Bonds are currently at 3.762% making it the lowest since March of 2009 which marks the beginning of the “recovery”. This sharp decrease in rates is the worst we have seen since the 2008 recession. This is not exactly a healthy signal in the market and may warrant further hedging of the equity portion of the portfolio if we continue to see such a negative signal in the fixed income markets. Typically Fixed Income is seen as a flight to safety, however there are outside forces involved in the these market lately.

The government has artificially kept rates low for a long period of time by purchasing longer term treasuries. In the most recent statement the government has decided to reinvest some of these purchases which will again artificially keep rates lower. Hedge funds have seemed to take notice of this practice and have helped to keep rates down by front running the governments purchases. An article released last week stated that Hedge Fund Activity has increased from 6% of the market to 20% of the market over the last year. There is a possibility that they are using treasuries to capture yield (cash is currently paying less than 5 50 basis points depending on your custodian) or collateral for leveraged positions, however, front running is the more likely scenario.

With Hedge Funds becoming more involved in Treasuries we can only imagine what will happen when the government signals the end to Quantitative Easing. Hedge Funds may de-leverage these positions causing a spike in yields and dramatic decrease in bond prices.