When the Music Stops: ProShares UltraShort Lehman 20+ Yr(ETF) (NYSEARCA:TBT) and iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT)

June 29, 2017, 10:10 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

The Smartest guys in the room are starting to get battered and we all should pay attention.  Where only a few days ago it seemed as if the US Treasury Bond Market was not going to fall in the face of higher interest rates, even though that seemed very unusual, UST has been falling relatively hard recently.

Only in two short days ProShares UltraShort Lehman 20+ Yr(ETF) (NYSEARCA:TBT) has increased by 5.5%, suggesting a decline in iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT) of about 2.75% over that same timeframe.  This means that bond investors, who are the largest demographic of investor in the economy, lost considerably over the past two days in what is considered to be a safe haven, Treasuries.

That's not as bad as it looks when comparing YTD results, because UST is still nicely higher YTD, but that brings us back to that first conundrum.  Why would Treasury Bonds be increasing in the face of higher interest rates anyway?

When the FOMC hinted they would begin to raise rates the bond market did react, it sold off as we would expect, because prices are inversely related to yield, since that announcement interest rates have done nothing but increase, and now the FOMC is planning to tighten monetary policy even further by reducing their balance sheet.

Still, even on the heels of this announcement, the Bond Market was increasing slightly, at least not falling, and that was extremely unusual.  But why in the face of both higher Target Rates and a tightening Balance Sheet by the FOMC, both of which influence market rates higher, would the rate paid on UST be falling?

That conundrum lasted until two days ago, and then the bond market seemed to start to care suddenly, but that is not the complete picture.

Although it appears as if the bond market started to care about interest rates, the focus all year so far has not been on tightening monetary policy domestically at all.  Instead, the focus has been on the liquidity injections by the ECB, which has been putting a fabricated demand on Treasury Bonds that bond investors, who are the smartest people in the room in most instances, completely recognize.

The Smartest people in the room know that the music will stop eventually, and two days ago the ECB said hat deflation was no longer a concern.  This is a major step towards the ECB ending their stimulus program, and it is this language that has caused the UST Market to react.  They have been riding ECB liquidity all year, but if that comes to an end so will the party.

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