In late 2013 just before the Federal Reserve began its scaling
back on monthly Treasury bond purchases, the conventional wisdom
was that interest rates would rise and bond prices would fall.
Invariably, the consensus opinion was - at it has been since
"quantitative easing" or QE began in 2008 - that "interest rates
have nowhere to go but up."
This time around, the Great Minds had finally figured out the
bond market. After all, the "dumb" Fed was choreographing its every
move. All 72 economists polled by Bloomberg at the start of 2014
confidently predicted that bond prices would fall and interest
rates would rise. Not a single one of them expected any other
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Never mind how all of these economists have been and continue to
be dead wrong. Their reasoning was if the Fed is buying
fewer Treasuries, it would create less demand for U.S. debt and
cause bond prices to trade at lower prices. Lamentably, the supply
and demand theories they learned in school failed them.
Yet, like so many times before, the logic of conventional wisdom
- especially when it's ignorant of market price trends
- turned out to be a big mistake.
Although the Federal Reserve did cut its monthly QE-bond
purchases to $65 billion per month in January, it had zero negative
impact on prices. At the end of January alone, ETFs tied to the
performance of long-term Treasury bonds like the iShares 20+ Year
Treasury Bond ETF (NYSEARCA:TLT) soared almost 6% while the SDPR
S&P 500 ETF (NYSEARCA:SPY), by comparison, fell 2.59%.
While doomsayers were predicting a crash in Treasury prices, we
told readers to ignore the hype and to focus on the facts. Via
from March 5, we said the following:
"Although it's still trading above its 50 and 200 day moving
average, the iShares 20+ Yr Treasury ETF (
) has cooled off after a hot year-to-date start. We like TLT, not
so much for its 3% annualized yield, but as a defensive play in
the face of an overheated stock market and possible war between
Russia and Ukraine. We're buying TLT at current prices ($106.72).
Even more, TLT should be the temporary beneficiary of capital
outflows from unstable emerging markets, which will keep prices
During its June FOMC meeting, U.S. policy makers agreed to cut
QE even further - to $25 billion. And by October, QEternity is
expected to end.
Now with 2014 more than half way over, the yield on 10-year
and 30-year U.S. Treasuries has done the exact opposite of what
most analysts predicted; by sliding in the vicinity of
20%. The sheer madness of what shouldn't be happening keeps
Meanwhile, traders in Treasury bond ETFs that go long with
leverage have been printing money. The ProShares Ultra 20+ Yr
Treasury ETF (NYSEARCA:UBT) and Direxion Daily 20+ Treasury Bull 3x
Shares (NYSEARCA:TMF) are sitting on YTD gains between 37% to 58%.
(See chart above) Not a bad year of performance, especially when
the year isn't even over. UBT uses 200% daily leverage while TMF
For Treasury doomsayers, the great collapse of unmanageable
public debt will have to wait. Market prices are the boss and right
now the bond market isn't done dismantling all of the logical
conclusions and conventional wisdom about what comes next.
"As investors, we also always have to be aware of our innate and
very human tendency to be fighting the last war. We forget that Mr.
Market is an ingenious sadist, and that he delights in torturing us
in different ways," said Barton Biggs.
Profit Strategy Newsletter
contains our latest view of TLT and other Treasury ETFs - which
continue to outperform both U.S. stocks and gold. Our largest
year-to-date winner is a +188% timestamped gain from our Jun. 5
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