TBT Ahead of the FOMC

Should Traders short the bond market by buying ProShares UltraShort Lehman 20+ Yr(ETF) (NYSEARCA:TBT) ahead of the FOMC rate decision?

The answer to that question ultimately lies in your perception of market risk.  There are a number of factors that drive investors to invest in the bond market and one of those is market risk.  Foreign investors who perceive risks in their country might also flock to the safe haven that is the U.S. treasury bond market, which in turn would also spur demand, so an evaluation of the bond market and the potential profitability from shorting the bond market must include not only an assessment of the direction of interest rates but also an assessment of risk as that applies to the demand for U.S. Treasury bonds.

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A handful of weeks ago TBT was trading over $50.00 per share.  During the 10% market slide that followed investors flocked into the bond market and the price of TBT plummeted to under $40.00 per share.  Before the drop many traders and investors were considering the short side of the bond market in absolute terms, because prices and interest rates certainly do have an inverse relationship, but they failed to assess the other variables in the equation.

As a result, many of those investors and traders who were buying TBT at or slightly above $50.00 per share suddenly found themselves down by 20% in an investment that many of them considered to be a sure thing given what most certainly is going to happen to interest rates.

Again, their failure rests in the observations of market based risk and demand for treasury bonds as that relates to flights to safety.  It is absolutely possible for investors to rush into Treasury bonds even if the FOMC raises interest rates.  The rationale would rest completely on market based risk perceptions, if that were to happen.

Our longer-term assessments suggest that the ongoing volatility in the stock market will cause more money to flock to treasury bonds and increase demand over time even if the FOMC begins to raise interest rates, but we do not expect that to happen immediately.

Considering the short side of the US Treasury market as an investment therefore does not seem logical because the perceived risk that we see in the stock market is higher than it has ever been before.

However, trading the short side of the U.S. Treasury bond market looked like a great idea when TBT was closer to $40.00 per share.  We recommended this to our clients as a trade closer to $40.00 per share with the intention of selling it closer to $50.00 per share.  The intention was to use this as a trading vehicle, we bought it near defined support levels as those are offered in our real time trading report for TBT, but we do not intend on holding this as an investment given our perception of risk going forward.

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