Let’s Go Bears: More Bond Supply on the Way

Hey There Income Hunters,

The latest projections from the Chicago Mercantile Exchange (CME) for monthly Treasury bond supply came out showing a major jump in May of $23 billion

The average size of the US Treasury auctions were less than that just 5 years ago …

Power Income’s #1 Fed Insight

I always stress that for EVERY dollar the Fed prints, the Treasury MUST issue a dollar of US Treasury Bonds to cover it. Those bonds are issued via publicly-held auctions.

We are already starting to see less participation in the auction process, as defined by the coverage ratios that the Treasury announces when the auctions are completed ..

This could eventually lead to an auction that doesn’t have enough buyers — which would force the Fed’s hand to step in and be the buyer of last resort …

And that is why leaning on supply can give you such a big advantage.

So, today I wanted to introduce a couple of other ETFs that can juice your returns when bond yields rise and prices fall …

Two Killer Bond ETFs

1. PIMCO 25+ Year Zero Coupon US Treasury Index ETF (Ticker: ZROZ)
The first ETF tracks zero coupon bonds, which is the asset class I traded most of my career …

They were a cool product that allowed investors to buy, what were essentially long-term Treasury Bills (T-Bills).

Meaning, you buy them at discount to 100 (par) and they always mature at par. The difference in prices is your return over the life of the security…

The investors receive a single balloon payment at maturity… making their duration much longer than the iShares 20yr+ Treasury Bond ETF (TLT) –with 10% higher volatility…

 Check out the chart below illustrating how they outperform on the upside and downside — which means more juice for you:

2. Proshares Ultrashort 20+ maturity Treasury Bond ETF (TBT)
The other product is a 2x bearish bond ETF. This ETF seeks daily investment results that are two times the inverse (-2x) of the daily performance of ICE U.S. Treasury 20+ Year Bond Index.

Bring it Home

I have been asked by a couple of #IncomeHunters if there is a calculation they could apply to the TLT ETF that would enable them to more accurately trade TLT as a proxy for the 10-year….

It makes a lot of sense in theory since the yield of the US 10-year is what global investors monitor so closely …

I have been tracking the two, however, their maturities are so far apart that the correlation breaks down. Here’s why:

The slope of the yield curve between 10-30 years is very steep and volatile, so you could be off by just .01%, which is a single basis point, and that could throw off the TLT price by as little as 18 cents… 

As always, keep the questions and comments coming. I will do some additional work on it and report back.

Until then …

Live and Trade With Passion My Friends,


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