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Forget the bank stress tests – the financial markets undergo a far more serious test this week and the results could changes to the way you trade.
That test comes in the form of the US government selling a massive amount of new Treasuries this week. Specifically, the government sold two-year notes on Tuesday, and will sell five-year notes on Wednesday and seven-year paper on Thursday
The pass/fail will be determined by how well these auctions are received – in other words, how well investors digest all the pending supply.
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As you know issuing debt is a cornerstone of the Obama plan to fund the massive stimulus – which is intended to drive the U.S. out of recession. But some pundits have questioned whether there’s that much demand out there for Treasuries.
Earlier in the month, those fears were realized. When the government issued 30-year Treasurys in early May – the auction was not terribly well received. As a result, the government had to pay higher interest than expected to attract buyers.
That is worrisome because if it’s a trend -- it could signal that it will become more expensive for Washington to finance its ambitious economic recovery plans.
Adding to the fragile situation is a note from S&P last week – cutting the credit outlook on the United Kingdom to negative from stable.
As a result, "People are asking, if the UK is having problems like this, then maybe U.S. sovereign debt is also not as solid," explains David Dietze, chief investment strategist at Point View Financial Services. In other words, if it could happen to England it could happen here.
Considering the importance of this week’s Treasury auction, how should you trade?
From a longer term perspective I think rates trend higher, says Barclays bond strategist Mike Pond. We have supply pressures – supply of Treasuries just continues to increase. As a result inflation will probably become a problem.
You can game that by getting long the TBT [TBT
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], explains Karen Finerman. It’s a bet on higher inflation and that a glut of Treasuries flooding the bond market makes it more and more difficult to get the auctions done. Personally, I think it's going to be an enormous problem
Or you can play TIP [TIP
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] or IPE [IPE
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], counsels Tim Seymour.
- HALFTIME REPORT: How to Trade Senator Dodd's Financial Reforms
- Your First Move For Tuesday November 9th
- Web Extra: The Dow's Only Loser
- Pops & Drops: Altria, Potash...
- Tech: The Trade of the Year?
- A Revitalized Credit Card Industry?
- Pure Plays For a Weak US Dollar
- Halftime Report: Retail - The Next Sector to Pop
- BEHIND THE MONEY: 'The Onion' as Trading Indicator
- Web Extra: The Final Trade
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Trader disclosure: On May 26th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Terranova Owns (ABT), (GENZ), (TER), (XBI), (JOYG), (IBM), (BRCM); Terranova Owns July Nat Gas Futures; Terranova Owns July Crude Futures; Terranova Owns June Gold Futures; Terranova Is Short (XOM) Call Spread ; Terranova Owns (DIS) Call Spread; Finerman Owns (RIG), (TBT); Finerman's Firm Owns (TBT), (CSCO), (PBR), (RIG), (CSCO), (NOK); Finerman's Firm Owns (WFC) Preferred; Finerman's Firm Owns (BAC) Preferred; Finerman's Firm Is Short (BAC); Finerman's Firm Is Short (WFC); Finerman's Firm Own 30-Year Treasury Puts; Seymour Owns (APPL), (BAC), (BX), (INFY), (F), (FXI), (EEM), (TTM), (CAT)
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