About Me

Retired chief investment officer and former NYSE firm partner with 40 years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Tuesday, July 02, 2013

Adding The Long Treasury Back To My Trading List

With the long Treasury now back up around 3.5%, I am returning it to my list of trade
candidates (long or short). Way back in late 1980, when I first started buying bonds I took
on but survived several bouts of career risk as a result. Since 1982, trading the long bond
has been a  cakewalk as we have seen a phenomenal bull market. Many think the low 2.55%
readings seen in 2012 mark the final bottom for yields (and top for prices). Could be, but
viewed long term, the 30 yr. Treas. yield needs to rise above the 4.20%  level and stay there
for a while before such talk would gain some credence.

For years, I have used a long term inflation assumption for the US of 3% per annum. Thus
for now, I am using a 3.5% cut off rule to buy the bond as purchasing the Treasury at or
above 3.5% gives you a shot at earning a minimum premium over inflation for the long
term. There have been many years since the early 1980s when the market has priced in
a much higher premium than 50 basis points over the long range inflation rate and when you
are trading you have to study to see at what premium over inflation the market may derive
comfort.

Take a look at the 30 yr. Treasury on a weekly basis from a yield perspective: Long Treasury
Viewed against the 40 wk. moving average, players have taken the Treas. yield up to a
large premium. So, I see the market as substantially too high on a yield basis and nicely
oversold on a price basis. Note that the technical indicators also suggest that the yield is
presently on the high side. In addition, some trader advisory services are now perhaps a
little too bearish on the market (Consensus Inc. principally).

Surprisingly, trading bonds can be a fairly simple matter often enough. This is not one
of those times despite the bearish sentiment and the deep oversold in the market. I even
think the yield on the long guy is too high relative the mopey, draggy performance of the
economy. But, players have begun to re-price risk in this market to account for the time
when the Fed may curtail or end QE and begin pulling the large bids now under the
range of fixed incomes. The stark response to the "taper talk" serves notice about the
nervousness of investors even though the recent adjustment could turn out premature.

Whatever, there has been enough damage done in the market to move me to consider
getting back into the game to look over possible opportunities.

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