This blog I would like to talk about shorting US treasuries.
There are two Exchange Traded Funds (ETFs) that you can short 2x, mid (7 to 10 year treasuries) and long (20+ years) term treasury bonds, using the Barclays US Treasury Index. These ETFs are (information from ProShares website):

- PST: Per prospectus, ProShares UltraShort 7-10 Year Treasury seeks daily investment results, before fees and expenses and interest income earned on cash and financial instruments, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 7-10 Year U.S. Treasury Index.
- TBT: Per prospectus, ProShares UltraShort 20+ Year Treasury seeks daily investment results, before fees and expenses and interest income earned on cash and financial instruments that correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Index.

You would think that this trade would make a lot of sense and would be a 'no brainer’. The US government is running a huge deficit and needs to sell a lot of US treasuries to fund it. (The next 4 years' deficit may equal or exceed the accumulation of the US deficit since Washington became president in 1789.) It's reasonable to expect that US treasury interest rates should be increasing. But the Feds (Federal Reserve Bank) have been keeping the interest rate low by buying mid and long term treasury bonds. They bought $300 billion of mid and long treasuries in 2009 and will buy another $175 billion bonds by end of the first quarter of 2010. The Feds do this for the following reasons:

- Increase money supply to reduce the threat of deflation in the US.
- Reduce the interest rate on bonds. This should boost spending and investment in the US in the long run.
- Make it easier to sell enough treasuries to support the large US deficit.
- Help to keep mortgage rates low to aid in moving the large house inventory in the US. Over the last 5 years the 10 year treasury and 30 year fixed mortgage have been moving in tandem. Over the last 6 months it hasn’t moved in tandem. The US government has been buying mortgage backed securities to keep the price down.

With the government keeping the long term treasury rate low the performance of these Ultra-short treasury index ETFs over the last year has not been good: PST - 21% and TBT - 29% (as of January 18, 2010. You do not want to be on the wrong side of this trade, which is 2x performance using interest rate swaps. If I was going to buy these ETFs today I would buy TBT (+20 year bond). I will put these ETFs on my watch list waiting for Feds to stop buying large amounts of treasuries and keeping interest rates artificially low. This could be a very good investment once mid and long term treasure rates start to climb.

A lot of foreign governments have been buying short term treasuries (less than 4 years). 65% of the outstanding treasury bonds are 4 years or less. When interest rates go up it is going to be very expensive to fund the US debt (an increasing amount of the US budget will be interest payments). This will lead to still higher deficits and an increase in the selling of treasuries which should drive the interest rates up.

It is going to be an interesting ride over the next year or two. What do you think of shorting treasuries? Will the Feds continue to buy treasuries and print a lot of dollars? What will the investing environment be like the next two years? What should be my next blog?

- Investing in Gold
- Shorting US currencies
- What sector will do the best in 2010?
- Other topics

In March I will be starting a financial website and in the summer I will start podcasting with Fullstacks and Mr. C (need to talk with him).
Please add your comment.

Paul