With all the ballyhoo about the coming ‘correction’ in stocks (loosely-defined as a 10-percent drop), the first asset class to do so may actually be Treasuries. The iShares Barclay’s 20+ Year Treasury Bond , an ETF set up to mimic an investment in Uncle Sam securities with longer maturities, is down nearly 5 percent from its high reached at the end of January. In a virtual tie, the S&P 500 is down 4.4 percent from its 2010 high.
The selling in Treasuries has intensified this week following two significant events. First, data from the Treasury showed that China was a seller of U.S. assets for a fifth straight month and second, the Federal Reserve’s policy meeting minutes released Wednesday showed that members are starting to favor a more aggressive removal of quantitative easing and other measures that have been used to keep rates low.
“The bearish case for Treasuries is our enormous deficits, debt buyers turning to other instruments, but some signs of economic growth as well,” said Karen Finerman, President of Metropolitan Capital Advisors. Finerman, also a ‘Fast Money’ trader, is betting against Treasuries by going short the iShares Treasuries ETF mentioned above and also long-term puts on the 30-Year Treasury.
An ETF that allows you to bet against Treausry notes even more aggressively than Finerman is the ProShares UltraShort 20+ Treasury Fund , which mimics twice the inverse of the Barclay’s Treasury Bond Index
The technical analysis case is setting up nicely as well for a breakout in Treasury yields (and subsequent fall in Treasury prices), according to Christopher Verrone, technical analyst for Strategas Research Partners. He correctly called for a breakout in the 10-year yield at the start of this week after identifying a bullish “head & shoulders reversal” pattern that developed over the last one year.
What could cause this Treasury correction to end? A big flight back to quality based on a European credit contagion, according to Finerman, as well as the U.S. getting its fiscal house in order by cutting deficits.
Obama named an 18-member deficit panel today to do just that, but Treasuries still fell anyway. These 18 folks have their work cut out for them.
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