Banking & Finance

Treasury Short Sellers Winning, More Risks Ahead

The never-ending bull market in Treasury bonds appears to be looking more and more as though the party is over. At some point, the risk-reward is just too great and people will only settle for a “return of capital” mentality for so long. Now that so many retirement plans have been derailed by missing five years of contributions, the great migration out of Treasury bonds is continuing to take hold as we identified back in December for “The Next Great Short.”

Long-term interest rates have risen handily in recent weeks, with the 10-year Treasury yield rising from 1.61% on May 1 to more than 2.20% today. One key driver to confirm the move against the bond bull market is this fresh and oddly timed ratings change from S&P’s rating on the United States. The ratings agency raised its outlook to Stable from Negative, thus removing any real obvious chance of a credit rating downgrade for the United States.

One true barometer of a bearish bet against Treasury notes and bonds is the ProShares UltraShort 20+ Year Treasury (NYSEMKT: TBT) with its two-times short the Barclays U.S. 20+ Year Treasury Bond Index. Many investors forget that this is an intraday moving ETF, so it will not always mirror the Treasury market moves if the big moves in yields take place in the evening or in the premarket (stock market) trading hours. Maybe the move was overdone on the top-tick, but it is no coincidence that the ETN hit a 52-week high of $70.09.

Another barometer is the iShares Barclays 20+ Year Treasury Bond (NYSEMKT: TLT), which tracks the price performance of the Barclays U.S. 20+ Year Treasury Bond Index. As yields rise, this drops in market value. It is no coincidence that this hit a 52-week low of $112.47 this Monday morning.

Goldman Sachs warned that the yield on the 10-year Treasury note would rise to 2.25% by fall and as high as 2.50% by the end of 2013. Bill Gross has even warned that the long-term bond investors are taking too much risk for too little reward.

We will pay close attention to long-term interest rates. It has an impact on dividend sticks, the dollar, gold and oil, mortgage rates, corporate borrowing rates and many other items that touch each of us every day.