This morning I purchased one June 2011 TBT $35/$47 CALL spread for $4.65 (x100 shares = $465) to supplement the (38) shares of TBT that I am currently holding in the portfolio. My cash position in the portfolio is now $781.42, down from $1,246.42 after the purchase.
I have been saying for quite some time that I believe interest rates will continue to rise, especially with Mr. Bernanke's QE2 which is scheduled to purchase near-dated bonds through June of next year (notice the date I picked on the options). While TBT has made an impressive move upward since the announcement of QE2, I believe it has a long way to go. I purchased the (38) shares of TBT currently sitting in my portfolio on 1/3/2010, the date I started this blog. Back then, the yield on the 10-year was 3.85%, and the TBT was trading at $43.66. Today, the 10-year closed at 3.35%, down .132%, and the TBT closed at $37.81, down 3.30% today. Obviously, I took a bit of a hit on the aforementioned trade today.
To put this all into a bit of historical perspective, the average 10-year rate from 1962 to the present (a pretty big sample size) is 6.81%. Furthermore, the average rate from 2000-2009 was 4.46%. You can download and analyze all of this data for yourself here.
Just to tie a pretty little bow on this whole conversation, not only are the historical rates still low, but the U.S. Government itself has already told us it is going to prop up rates through QE2, and we there are also other forces at work which may drive rates up (see my post from yesterday here, more specifically, China and oil). As inflation begins to creep into the economy, and I am not saying it will, so too will the interest rates increase. Actually, just the fear of inflation is all that's needed.
Just so you know, QE2 is intended to keep rates LOW, not high. Buying bonds increases artificially demand on treasuries, raising bond prices, but lowering interest rates. That's the theory at least. I'd consider an improving economy, increasing inflation and a much more conservative congress to be Bernanke's biggest hurdles, but QE2 should not be considered a reason to hope for higher interest rates.
ReplyDeleteThanks for posting!
ReplyDeleteOn the date of the announcement (Wednesday, November 3rd, I believe), the rate of the 10-year closed at 2.67%. Yesterday, the yield on the 10-year closed at 3.50%.
The intent of Bernanke's plan is to stave off deflation by increasing the money supply. Typically, the Fed does this by decreasing interest rates, but they've already shot all those bullets. As the Fed begins to buy Treasuries, inflation expectations for the back-end of the curve increase, thus raising interest rates on the back-end, and decreasing the price of treasuries.
I have been playing this move with the $TBT, as that tracks the 20-year on the short side.