In this thread we'll attempt to make a case on a short trade of US Bonds. We can also discuss various way to trade it (e.g. short futures, short TLT ETF, ED calendar spreads, reverse funds etc) This is a followup to the thread at http://www.elitetrader.com/vb/showthread.php?s=&threadid=43253 on suggestion of another contributor. Everyone, please feel free to share your ideas. As this is obviously a longer term trade, I think that fundamental issues should be given some attention. In a few words, this trade is based on the following premises: 1. The reason why long-term bond yields are held at these levels, is buying by Asian Central Banks (BoJ and BoC) to maintain a peg between their currencies and the USD. This buying is regardless of market value or economic outlook. The continuation of this practice is questionable. 2. The pressure on the yields of long bonds is also due to the "carry trade", where big players are borrowing at short-term rates and investing at long-term rates. "Neutral" FedFunds rate is assumed to be around 4% (even with "engineered" CPI numbers). If Fed fails to promptly raise STIRs it'll do the same mistake BoJ did in late 80s thereby planting the seeds of the economic woes that continue to plague Japan today (pls refer to last link, the one about Japan). 3. US administration will probably "inflate away" the debt (as suggested by many prominent figures, e.g. Warren Buffet). Actually monetary / credit inflation is manifesting itself in many ways (e.g. CRB rally, housing bubble). Some background reading list: US Gov inflation con job http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2004/IO_Oct_2004.htm http://moneycentral.msn.com/content/P92951.asp http://www.safehaven.com/showarticle.cfm?id=2407 http://www.safehaven.com/showarticle.cfm?id=2400 It's pretty obvious that real inflation is nowhere near the official numbers. Macro outlook http://www.morganstanley.com/GEFdata/digests/20050103-mon.html Note: Roach/MS says that private buying is even more than FCB buying (I assume he has his facts straight, but maybe someone can confirm?) Roach: "In the 12 months ending October 2004 (latest US Treasury data available), net foreign buying of long-term US securities totaled $850.6 billion, well in excess of the cumulative current-account deficit of $603 billion recorded over the four quarters ending in 3Q04. Yes, there was an increase in the share of dollar-denominated assets purchased by foreign central banks, from 18% to 27% over the past year; this was a conscious policy choice, largely aimed at preventing Asian currencies from rising and thereby impeding the region's export-led growth dynamic. But the bulk of the flows still came from non-US private investors seeking return and/or security in dollar-denominated assets. And nearly 97% of the net flows were concentrated in fixed income securities, as foreign buying of US equities remained de minimus. Little wonder US interest rates stayed so low. Needless to say, if this voracious foreign appetite for US bonds remains intact in 2005, another interest rate surprise could well be in the offing. I doubt it, but stranger things certainly have happened." Japan intervention issues http://188.8.131.52/print/business/nb05-2004/nb20040503jp.htm Note: Apparently, through its intervention practices, BoJ is now sitting on $800bn of dollar securities. BoJ's balance sheet is 30% of GDP. And "paper losses" of these positions are estimated between $70-$100bn.