The “No Brainer” Trade

Nassim Nicholas Taleb who sprang to fame with his widely read and well received book, “The Black Swan,” recently said at a conference in Moscow that shorting U.S. Treasuries is a “no brainer” trade. 

With the Fed’s action last Thursday to raise its discount rate, more attention has been focused on the Fed and the future of interest rates and how and how fast the Fed might unwind the emergency fiscal policies they’ve had in place in response to the ongoing global financial crisis. 

With interest rates near zero, it seems logical that over time interest rates have no place to go but up and that as the global economy recovers, we could be facing an environment of rising interest rates. 

For investors who believe that interest rates are due to rise, three ETFs are available to “short” the U.S. Treasury market.

 
Chart courtesy of www.stockcharts.com 

(TBF) ProShares Short 20+ Year Treasury offers short exposure to the long U.S. Treasury market and has experienced steadily increasing volume since its introduction last August and offers 100% inverse exposure to the daily performance of its underlying index, the Barclay’s Capital 20+ Year U.S. Treasury Index. 

For more aggressive investors, leveraged short exposure to the U.S. Treasury market is available with (TBT) ProShares UltraShort 20+ Year Treasury which offers 200% inverse exposure to the U.S. Treasury market as depicted in the chart below.

Chart courtesy of www.stockcharts.com 

This ETF was started in April, 2008 and has $4.6 billion in assets and volume of over a million shares per day.  As a leveraged ETF, it resets its price daily and is designed to track the daily performance of the Barclay 20+ Year Treasury Index. 

Finally, for the most aggressive investors and traders, Direxion Shares has introduced a leveraged ETF that offers 3X exposure to the Treasury market.  Their short offering is (TMV) the Daily 30 Year Treasury Bear 3X Shares that offers 300% inverse daily price performance to the 30 Year Treasury Index.  Started in April, 2009, it is part of the Direxion stable of triple leveraged ETFs.

chart courtsey of www.StockCharts.com

So there’s a wide range of opportunity for people who believe that interest rates are going to rise with a corresponding drop in the face value of bonds.  Whether or not this trade is a no brainer remains to be seen, but as always, ETFs offer an opportunity for exposure to virtually any market one could choose.

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All the best,

John

Wall Street Sector Selector

All material herein is believed to be correct but its accuracy is not guaranteed.  This article represents solely the opinions of John Nyaradi and readers are encouraged to consult their investment advisors prior to making any investment decisions.  All information herein is for general informational and educational purposes only.  The information is of an impersonal nature and should not be construed as individualized advice or investment recommendations. There is risk of loss in all trading and readers are encouraged to read the full disclosure statement at http://www.wallstreetsectorselector.com/disclosure.html.  None of the information in this article is intended to be investment advice or any kind or offer or solicitation to buy, sell or otherwise invest in any fund, company or security.  Nothing herein represents a recommendation, claim, promise, guarantee or warranty regarding the suitability or profitability of any investment