Sell TLT Into Record Bond Issuance Next Week

Hey There Income Hunters, 

The Fed is now turbocharging quantitative easing (QE) to the tune of $160 billion in securities per month.

No wonder J-Pow flip flopped on tapering …

He’s actually doing the opposite and has ramped up QE.

Now, I can understand why he has not formally announced anything, the market does not react well to uncertainty, as we’ve seen time and again.

The bottom line is, more money printing will simply push inflation even higher and eventually cause the psychology of investors to shift toward a distrust of the Fed …

It will also eventually ignite the selling of US Treasury bonds and force the Fed to buy even more down the road

For now, the extra purchases of bonds has fueled a major four-month drop in 10-year interest rates as illustrated by the chart below …

This sets up an interesting opportunity for next week when the Treasury must issue $126 billion of 3-year, 10-year and 30-year Treasury notes and bonds … 

I’ll share the trade I am looking at — along with other supporting data, which makes this trade a good low/risk high reward opportunity … 

Getting Short TLT

Heading into next week’s supply may be an exceptionally good time to set up a short in iShares 20 Plus Year Treasury Bond ETF (Ticker: TLT).

Here are a couple of reasons why: 

      1. 10-year Treasury bonds currently yield 1.20%, while inflation as measured by the consumer price index (CPI), is 4.5%. So, investors net real return, meaning CPI minus the 10-year rate, is -3.3%. Investors are better off buying precious metals, which closely track negative interest rates 
      2. Investors are net long 10-year bond futures, which means there may be a lack of interest in the auctions next week. In fact, in the commitment of traders (CoT) report, the 2-year and 10-year are around two standard deviations, as measured by the Z-score, away from their mean:

Normally, traders use the futures contracts to offset, or hedge, their underlying security exposure. But the sharp drop in rates/rise in prices has triggered a short squeeze, which now may be near completion judging by the CoT …


Reports of Note

Remember, the CoT provides valuable input to your trading decisions. It comes out every Friday and includes a week’s worth of trading up to Tuesday of the week it is issued.


Another valuable report is the Treasury issuance report provided by the Chicago Mercantile Exchange (CME) …


This report gives you a good idea of upcoming supply for each maturity bucket including 2-year, 3-year, 5-year, 7-year and 10-year, which are defined as notes and 20-year and 30-year defined as bonds. Each maturity bucket is illustrated below with their monthly issuance amount…


As you can see, for August, total issuance equals $336 billion … with $58 billion in 3-years on Tuesday, $41 billion in 10-years on Wednesday and $27 in 30-years on Thursday.


How to Play This Trade


TLT is an ideal proxy for the 10-year, 20-year and 30-year Treasury notes and bonds. Let’s take a look at the TLT chart setup:

The first thing I notice is that the short-term trend is up as illustrated by the 50-day moving average, and the long-term is down depicted by the downward sloping 200-DMA.


Also, the 50% Fibonacci retracement of the downturn that began last August is 152.72, which is $.03 below the price that TLT failed at in July. That is a good resistance level and a good stop-loss level to close a bearish TLT trade.


My choice is to have a TLT 151/149 put spread on to the Aug. 13 expiry. That will cost around $.80. I will only put on half a position now.


I want to have something on now because I think Friday’s employment report will be stronger than expected. I’ll also either add more or roll into other strikes if the market moves away from 151.


Bring It Home

Since the technical setup is not bearish in the short-run I will not put on a max position.

However, there is a chance the technicals could turn back to bearish and I could stay in the trade anticipating a resumption of the downtrend.


Stay tuned …


Live and Trade With Passion My Friends,




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