Getting whipped shorting Treasuries

Aug 27 2009 - the story of tbt
Getting beat. Treasuries continue to head in the wrong direction with regards to my large short position. Yield continues to shrink while supply of the debt instruments continues to increase. Who's buying this stuff? Probably banks by means of their increasing supply of reserves and savings that are not being lent out because the economy is still judged too risky. banks can borrow money at .25% interest and purchase government debt for a small but still higher return on treasuries allowing the fed to keep interest rates low. new issues of treasuries have been well bid 2.5% vs. avg of 2.2%. 50% of the buyers are central banks.

the idea behind the leveraged and over-large play on TBT (or short 20 year bond) has been that this is one market with somewhat predictable dynamics structured by involving large players. with the recession being touted as past there should be an outflow of money from treasuries to more risky assets. additionally, foreign banks should lighten their subscription to us bonds as the global economy reflates. solid reasoning, however banks continue to fear lending money instead turning a profit from investing borrowed money from the fed to buy treasuries which are used as collateral to borrow even more money from the fed. reserves are swelling but as yet there is no inflation push.

the whipping of TBT could be advance notice that the market is set to reverse as risk again results in treasuries being sought as a safe haven. i have taken a largish short position in SDS to see what happens in the next 2-4 days.

the overall volume of trade in the market is small and concentrated in the most speculative stocks such as AIG, Freddy mac FRE, Fannie Mae FNM, Citicorp even bankrupt GM which accounted for 40% of volume in August. WHOA!!

too much risk. will recalculate in the next few days, perhaps surrendering for the predictability of short-term bonds.