Hey There Income Hunters,
Money supply growth continues to rise and there is a new force at work that may ignite inflation higher and for longer.
What is it?
That cost of shipping goods around the world.
Reports last week outlined that manufacturers have been forced into bidding wars for space on vessels. This desperate competition has pressured the Baltic Dry Index, which measures the price of moving raw materials globally, into the stratosphere:
The realization of continued inflation will have an impact on bonds and now looks like good timing to set a short in the iShares 20 Plus Year Treasury Bond ETF (Ticker: TLT).
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Banks Are Choking on Financial Assets
The Fed continues to do at least $120 billion a month in quantitative easing … that is useless and just sits within the banking system:
All the Banks can do is sell securities to the Fed when they come knocking and then buy more in the Treasury auctions to load up for the next round …
Well now the Fed is throwing a wrench in those plans by teeing up their taper strategy, when they’ll reverse QE and SELL bonds to the banks to drain reserves from the system.
Judging from the chart below, the banks will not want to buy many bonds in auctions if the Fed is also going to be selling them bonds …
So, we have banks overflowing with dollar assets as we enter a Fed policy shift to sell banks securities.
Treasury Supply Schedule for Next Week
Labor Day weekend is coming up, and the shortened week will add to the difficulty for investors to absorb the bond issuance …
Next week, investors will be bidding on $61 billion in 3-years (Tuesday), $38 billion in 10-years on (Wednesday), and $24 billion in 30-years on (Thursday) …
With all the uncertainty on the Fed taper and inflation, bond prices will be pressured and TLT is an ideal ETF to sell because it matches up with 10-year and 30-year maturities.
TLT Technical Setup
TLT is in a short-term downtrend with a downward sloping 200-day moving average.vI would like to see a solid break of the 50 DMA on higher volume to confirm bearish trends in all time frames.
With the supply next week, however, I think the risk/reward is favorable to play the trade with a tight stop above 150. On the downside I think 146 to 146.50 is reasonable.
I purchased a 149/147 put spread to the Sept. 10 expiration for $.77 and will add either on a break lower or a spike higher on Fridays nonfarm payrolls.
This is an opportunity that puts the probabilities in your favor.I have put half a position on now.
Bring It Home
The TLT auction setup trade has been working well over the past couple of months as the inflation scare puts pressure on bond prices.
Live and Trade With Passion My Friends,