Tim Price: Government agents
Comment of the Day

April 11 2011

Commentary by David Fuller

Tim Price: Government agents

My thanks to the author for this ever-interesting and original letter, published by PFP Wealth Management. Here is a brief sample:
And if there were ever a time to be concerned about the prospect of capital loss in G7 government bond markets - whether via serious price degradation consistent with rising market interest rates or, ultimately, via terminal default or inflationary repudiation - now is that time. While Portugal has been the latest sovereign to make a step forward in the direction of potential ethnic cleansing from the grand Euro project, the European Central Bank has helped it on its way by nudging Euro interest rates a tad higher, from 1% to 1.25%. That represents a rise of just 0.25% in absolute terms, but a more meaningful 25% in relative terms. For mortgage holders struggling to service their debts while interest rates rest, for the moment, at multi-century lows, the threat of higher rates in relative terms is almost tangible. The Bank of England may be next to raise rates, albeit in too pusillanimous a fashion to dent rising inflationary pressure; for the US Federal Reserve, a policy rate rise any time soon seems like a ridiculous fancy. But the timing is of secondary importance. What matters is that the interest rate cycle is turning. The tide is going out for conventional government bonds, which continue to benefit from ridiculous perceptions of risklessness. Financial markets are now transfixed by the prospect (probably an unrealistic one) of a halt to Quantitative Easing on the part of the Fed. Playing chicken with the monetary authorities is never to be encouraged. The next few months are unlikely to be calm for financial markets.

David Fuller's view Some of us who seldom invest in government bonds may be tempted to trade them via futures from time to time.

My intention is to continue trading US 30-year Treasury futures on a sell-high-buy-low basis, short positions only. Trading is not for everyone and I am certainly not advocating it for people who do not already consider themselves traders. However, for those who remain bearish of the sector and share Tim Price's views mentioned in his letter, the analytical logic is clear. The tricky bit is in the timing, as is so often the case.

We will see more ranging than trending, as I have said on many occasions, not least in Audios. As 30-year T-Bonds (weekly & daily) have traded somewhat lower within a range recently, I have limit orders to cover futures positions incrementally in the event of additional weakness.

However if the S&P500 (weekly & daily) were to experience a reaction (I currently have some hedge shorts in the S&P, the opportunity to cover bond futures lower could be postponed.

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