Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20
AMD is KILLING Intel as Ryzen Zen 3 Takes Gaming Crown, AMD Set to Achieve CPU Market Dominance - 13th Oct 20
Amazon Prime Day Real or Fake Sales to Get Rid of Dead Stock? - 13th Oct 20
Stock Market Short-term Top Expected - 13th Oct 20
Fun Stuff to Do with a Budgie or Parakeet, a Child's Best Pet Bird Friend - 13th Oct 20
Who Will Win the Race to Open a Casino in Japan? - 13th Oct 20
Fear Grips Stock Market Short-Sellers -- What to Make of It - 12th Oct 20
For Some Remote Workers, It Pays to Stay Home… If Home Stays Local - 12th Oct 20
A Big Move In Silver: Watch The Currency Markets - 12th Oct 20
Precious Metals and Commodities Comprehensive - 11th Oct 20
The Election Does Not Matter, Stick With Stock Winners Like Clean Energy - 11th Oct 20
Gold Stocks Are Cheap, But Not for Long - 11th Oct 20
Gold Miners Ready to Fall Further - 10th Oct 29
What Happens When the Stumble-Through Economy Stalls - 10th Oct 29
This Is What The Stock Market Is Saying About Trump’s Re-Election - 10th Oct 29
Here Is Everything You Must Know About Insolvency - 10th Oct 29
Sheffield Coronavirus Warning - UK Heading for Higher Covid-19 Infections than April Peak! - 10th Oct 29
Q2 Was Disastrous. But What’s Next for the US Economy – and Gold? - 9th Oct 20
Q4 Market Forecast: How to Invest in a World Awash in Debt - 9th Oct 20
A complete paradigm shift will make gold the generational trade - 9th Oct 20
Why You Should Look for Stocks Climbing Out of a “Big Base” - 9th Oct 20
UK Coronavirus Pandemic Wave 2 - Daily Covid-19 Positive Test Cases Forecast - 9th Oct 20
Ryzen ZEN 3: The Final Nail in Intel's Coffin! Cinebench Scores 5300x, 5600x, 5800x, 5900x 5950x - 9th Oct 20
How Soon Will We See Stock Market SPX 4000? - 8th Oct 20
Stock Market Spy ETF Testing March Price Peak – What Do the Charts Say? - 8th Oct 20
5 Consequences of US Debt at $50 Trillion - 8th Oct 20
Long Term Cycles Suggest Stock Price Reversion Pending & Gold Price About To Explode High - 8th Oct 20
AMD Zen 3 Ryzen 5000 Launch - Performance, Prices Skews, Cinebench r20 Scores, 5800x, 5900x, 5950x - 8th Oct 20
Gold vs. Silver – Absolutely No Comparison - 8th Oct 20
Gold: Why You Should Be Wary of the "Consensus" - 8th Oct 20
UK Covid-19 Hospital Admissions and Deaths Since Testing Positive in 28 days Analysis - 7th Oct 20
Amazon Prime Day 2020 Sales Top Tips of How To Get Big Savings! - 7th Oct 20
Want To Win Big In Forex Trading? Leverage Is Your Friend - 7th Oct 20
Why I am Voting for Donald J. Hitler - 6th Oct 20
Markets Chop & Grind: Gold, Stocks & Commodities - 6th Oct 20
Silver Price Great Buy Spot Ahead of Second Big Upleg - 6th Oct 20
Forget RTX 3080 Get Zen 3 Ryzen 5900x / 5950x - GPU vs CPU - PC Bottlenecking - 6th Oct 20
How to Get Budgies / Parakeets to Eat Vegetables for the First Time - 6th Oct 20
How to Pick a Reputable Double Glazing Window Company - 6th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

How to Profit from Rising Interest Rates

Interest-Rates / US Interest Rates Feb 11, 2011 - 05:16 PM GMT

By: Terry_Coxon

Interest-Rates

Best Financial Markets Analysis ArticleTerry Coxon, The Casey Report writes: In the fall of 2008, the Federal Reserve responded to the Lehman bankruptcy by igniting a rapid expansion in the U.S. money supply. It did so because, by its lights, the immediate and obvious menace to the economy was a deflationary collapse, with one giant bankruptcy breeding another. And it went about the task without compromise; the monetary base more than doubled in less than a year, and the public's M1 money supply (checkable deposits plus hand-to-hand currency) jumped by 20%.


To some investors, including many of the editors at Casey Research, this policy seemed to guarantee price inflation sooner or later – which, when it came, would mean higher interest rates and falling prices for long-term bonds, including Treasuries. Or, as a speculator would put it, when the time comes, a lot of money can made by shorting T-bonds.

But "sooner or later" is a nearly useless foresight. So far, as Treasury bonds were concerned, the fear brought on by the bursting of the housing bubble, tumbling stock prices, the near-death experiences of large financial institutions, and the well-publicized bailouts of public companies trumped any concerns about inflation somewhere in the future. The compelling desire, especially among institutional investors, was to escape default risk, and that meant buying Treasuries. Inflation was a hypothetical event that could be dealt with later.

For investors who've followed the inflation-vs.-deflation debate and who've come down on the side of inflation, shorting Treasuries looks like a sure thing – and has looked that way for the last two and one-quarter years. But for investors who acted sooner rather than later, results have been disappointing. Every time rates started to rise, bad news from somewhere would revive fears of everlasting recession, a new wave of defaults, or a tumble into the deflationary abyss. Housing prices would take another step down. The reported unemployment rate would stall or rise. The specter of a default in the sovereign debt of a European country would reappear. And every time, whatever the problem, it would stimulate flight-to-safety demand for U.S. Treasury securities. So there was no sustained rise in T-bond yields.

Shorting an investment has costs. In the case of a bond, even if the price stands still, the cost of maintaining a simple short position is the difference between the yield on the bond (which the short-seller must pay) and the yield on the cash that is credited to the short-seller's account. You can't dodge that cost by using futures, options, or an exchange-traded fund. Regardless of how the instrument is put together, the performance will reflect the cost of a simple short sale. So while the investor who bet on rising T-bond rates as soon as the Fed turned on the printing press didn't get whacked by the behavior of bond prices, he did suffer a substantial, ongoing leakage.

Stacking the Deck

If you were one of the earlier investors, you may have already thrown in the towel. With the meter running, being early doesn't feel much better than being wrong. But I believe that the mere passage of time plus the accumulation of inflationary forces (also known as "stimulus") has stacked the deck in favor of shorting Treasury bonds as a timely move. Later is now. Here are the reasons.

  1. The government has actually done what it said it would do. It has run trillion-dollar-plus annual deficits, and it has bloated the M1 money supply. (That's the accumulation of inflationary forces.)

  2. With QE2 (the second round of money creation and attempted interest-rate suppression), the Federal Reserve will be doing more of the same at least into the middle of 2011. And with the current federal budget plans, the Treasury also will be continuing on the path it set upon late in 2008.

  3. Inflation is starting to look overdue, which increases the chance that it's not too far away. The effects of money creation don't follow a tight schedule – moving more like a jitney than a metronome. But on average, a burst of money creation will have its peak effect on economic activity 9 to 18 months later, and the peak effect on price inflation may not show up until a year after that. It's now two and one-quarter years since the monetary burst began.

  4. The stock market has been doing what it usually does before economic activity starts picking up – it's been rising.

Does this add up to a sure thing of rising yields and falling prices for Treasuries in 2011? No. But it does stack the deck, which is all a speculator can ask for.

How It Might Look

If a rise in T-bond rates is what lies in the near future, there are three ways it might play out.

The first is a gradual but persistent rise. As the economy recovers, so does the demand for loans, so interest rates on all types of credit instruments, including T-bonds, also rise. And as the fears of 2008 and 2009 become more distant, the public leans more and more toward spending the excess cash the Federal Reserve has created, so inflation picks up. And keeps picking up. So interest rates keep rising.

The second possible pattern is a sudden jump in interest rates as investors seek to dump dollar-denominated bonds. The triggering event might be a new war that guarantees even bigger federal deficits or an announcement from the Federal Reserve that it is considering QE3. As we've seen with the serial sovereign debt crises in Europe, a flutter from any not-so-white swan can set things off.

And, of course, the rise in interest rates could begin with the first pattern and then jump into the second.

How It Might Be Interrupted

The dollar is still the world's currency, the U.S. Treasury still looks like the world's most reliable sovereign borrower, and by the standards of most of the world, the U.S. still looks like a haven of stability. So any troubles outside the U.S. that didn't directly threaten the U.S. would bring flight-to-safety buying, which would temporarily depress T-bond rates. Or an actual default by Greece or any of the other popular candidates for sovereign bankruptcy would, for a while, reverse the rise in Treasury bond yields. A major war that the U.S. stayed out of (if you can imagine such a thing) would have the same effect.

Any such setback for short-sellers of Treasury bonds would be short-lived. The reason for expecting a rise in rates isn't the events that lie ahead. It is the money creation and the deficits that have already occurred.

How to Place Your Bet

The most efficient and reliable way to speculate on rising interest rates is something most investors don't want to do – use the futures market. If you do take that route, I suggest shorting the 10-year T-bond. That's the maturity the Federal Reserve is targeting with QE2. There is no better way to boost your odds than to short the bond whose price the government is trying to support. The fire-and-forget strategy would be to deposit sufficient margin (as required by the particular broker you trade through) to keep your position open even if the rate on the 10-year bond falls back to 2.4% – which is the low since 2007. That's the simple and cautious approach. It would limit your leverage, but it also might improve your sleep patterns.

The more convenient way to speculate on rising interest rates is to use the Rising Rates Opportunity 10 ProFund, which is a mutual fund that tries to emulate a non-leveraged short position in Treasury bonds. Such funds have an unavoidable shortcoming: maintaining a 100% short position in anything isn't easy when capital is flowing into or out of the fund every day. This may make an investment in fund shares more profitable or less profitable than a short position in the futures market that you establish for yourself. It adds another element of uncertainty, like play in a steering system. That's a flaw, but for an unleveraged fund, I wouldn't rate it as a disqualifying flaw since, as I want to make unmistakable, we're talking about a speculation.

[Terry Coxon is a contributing editor to The Casey Report, Casey Research’s flagship advisory for big-picture investing. For a very limited time, you can now get one full year of The Casey Report for only $98 – that’s 72% off the regular price. Sign up risk-free, with our 3-month money-back guarantee. But hurry, this offer ends soon… details here.]

© 2011 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules