Saturday, January 09, 2010 11:51:06 PM EDT Take Your Pick by James Brown Click here to email James Brown

A Way to Trade U.S. Bonds

Editor's Note:

U.S. debt is exploding! If you thought 2009 was bad the Treasury plans to sell about $2.5 Trillion (with a T) in 2010. Many were surprised at how much appetite there was for U.S. debt in 2009 with the economy struggling and unemployment at 25-year highs. While it looks like the economy might bounce I fail to see how demand for bonds will remain strong enough to absorb this huge amount of issuance. Thus bonds seem destined to move lower and that's going to push bond yields higher. Every auction is going to be watched for a potential failure when demand finally fails to meet supply. A failure doesn't have to happen. If foreign investors finally decide they want more return for buying U.S. debt it will push yields higher.

There are two ways to play this. You can buy call LEAPS on the TBT, which is a short-bond ETF and will rise as bonds go down (bond yields rising). Or you can buy put LEAPS on the TLT, which will fall as bonds fall. I am listing both. Depending on your view of the U.S. debt situation you may want to consider the 2012 options instead of the 2011 options.

TBT $50.63 -0.01 -- UltraShort 20+ Year Treasury Bond ProShares

Why We Like It:
I explained in the Editor's Note above our outlook on the bond market. This ETF doesn't move super fast. I'm suggesting bullish positions now but you could choose to wait for a dip back toward $48.00 or a breakout over $52.00. This is a long-term trade (12 to 24 month time frame). Be sure to give yourself a wide stop loss. I'm starting our trade with a stop at $41.90.

Company Info:

This is an exchange traded fund (ETF) that tries to deliver twice the inverse performance of the Barclays Capital 20+ Year U.S. Treasury index.

Use the 2011 January calls (Entry point - now, at current levels)

BUY CALL JAN 2011 $55.00 strike (XRJ-AC) current ask $4.90
-or-
BUY CALL JAN 2012 $60.00 strike (YHT-AH) current ask $7.90

Chart of TBT

TLT $89.29 -0.04 -- iShares 20+Yr Bond ETF

Why We Like It:
I explained in my Editor's Note above why our outlook on bonds is bearish. I am suggesting positions now but there is no rush. This is a long-term 12 to 24-month trade. You could wait for another failed rally near $92.00 or wait for a new relative low under $87 before initiating positions. Our first target is $81.00. I'm suggesting a stop loss at $100.50. More conservative traders can use a stop closer to $96 or the 200-dma.

Company Info:

The TLT is an exchange traded fund that tries to mimic the performance of the Barclays Capital U.S. 20+Year Treasury Bond Index.

Use the 2011 January puts (Entry point - now, at current levels)

BUY PUT JAN 2011 $85.00 strike (VJL-MG) current ask $6.40
-or-
BUY PUT JAN 2012 $80.00 strike (YLI-MB) current ask $8.90

Chart of TLT