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Rydex offers retail investors a means to short the long bond through RYJUX. ($25k min.) Their competitors, at www.profunds.com , just rolled out RRPIX, which is a 125% leveraged version. ($15k min.)

If any of those concepts are unfamilar to you, you likely have no business using either of the products. But more experienced investors *might* consider hedging or speculating with them as we go forward toward the certainty of Fed hikes.

Disclaimer: I'm currently long neither, which is going to change, which is NOT investment advice. Of two shops, I prefer ProFunds, which is NOT a recomendation, just a reflection of my experience with them. Your milage may vary, etc.

Charlie
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Charlie, do you feel pretty comfortable shorting the long bond now? That is, do you feel confident that the downside potential for this approach is relatively limited at this point?

Matt
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Matt,

The short answer to your questions is "No, not quite yet" for reasons both technical and fundamental that I don't want to grind thorough, but, "Yes", as sure as the sun will rise in the eastern sky tomorrow morning, the Fed will hike interest rates in the future, rather than leave them at their current historic lows, and a new cycle will begin from our present trough and shorting will become appropriate, all the while keeping in mind that the market controls the long end and the Fed the short end, not that the two aren't related, plus a lot of supply factors, etc., etc.

But, in the meanwhile, pull a chart for the 30-year bond [ticker TYX--X, if you're using a data service like TC2000, which plots yield rather than price], and start watching the action and looking for the factors that seem to driving yields and prices. When you have a good sense of the rhythms, then start thinking about how to position yourself to take advantage of the rhythms, keeping in mind that I'm not taking about the intraday moves that the professional traders are capturing, but the intermediate time frame moves that the average retail investor should be able to see on weekly charts and successfully time entries and exits with a moving average, a relative strength indicator, etc.

Again, I want to stress to anyone reading this post that I'm NOT offering investment advice, merely pointing to tools and techniques that *might* be of interest to fixed-income investors who are questioning the wisdom of depending on the buy-and-hold approach to preserve capital, much less appreciate it. And for some specifics, check out the current issue of Futures Magazine, which has several articles that deal with trends vs mean regression and timing/trading them that can be extrapolated to FI investing.

Charlie
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Charlie,

Are you expecting or hoping for an upward spike in the value of the long term bond in the near future, prior to entering your short position? From your post, it sounds like you believe that may be the case. I haven't heard anything about any expectations of further lowering of interest rates. If so, how is the price of the long bond going to spike up?

Matt
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maybe this helps explain...

Crumbling Corporate Bonds Market Wags the Equity Dog
By James J. Cramer

05/07/2002

The untold story of this market is the incredible collapse of the corporate bond market. Every day, some new company is downgraded to junk or almost junk, and that causes, as if by rote, many of the corporate bond mutual funds to dump, wholesale, the corporate bonds of the target.

This degradation is reminiscent of the government's decision 10 years ago to limit the amount of junk that savings and loans could own. It caused a total rupture in that market.

That's what we are getting now. Nothing moves a stock down faster these days than a downgrade from the Moody's and Standard & Poor's folk. Not only do you have those who bail immediately on this stuff, you also have many hedge funds that are short stocks and long bonds -- and they have no choice but to put out more common stock when they see their bonds going down. If they don't do it right, they could be history, a la the funds run by Ken Lipper that did convertible arbitrage.

Unfortunately, the bond market is not well-followed by the media. It is regarded as a backwater, the tail that wags the equity dog. The reality is that the opposite is true: The equity tail is getting crushed by the bond dog!

That's what you have to be watching.

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Matt,

Right now bond prices are close to their highs, which would seem to be the time to initiate the short position in expectations of being able to cover when prices do fall, but war worries and some tricky inflation stuff are messing with what I was expecting to happen and keeping the Fed at a neutral stance. In fact, yields at the long end are still falling, as the channel on a chart will show.

I'm not commited to making the short bond play, but I'm watching for the opportunity. If it unfolds, I made the trade. Otherwise, I do other things like hold my nose and look at junk, or at equities (where despite the continuing declines in the broad market there are some pockets of strength, particularly in small caps, and, with the falling dollar, possibly foreign stocks, as Buffet is beginning to tout.)

My only point in calling attention to the fact that things like RYJUX and RRPIX exist is that most people don't have the expertise to use debt futures, and bear bond funds are the only way they can trade the downside of the bond market if they wanted to do it. Do they have to attempt the trade? Of course not. But knowing that the tools and techniques are available and knowing exactly why one is choosing to use them, or not, reinforces other investing skills that help keep one out of trouble over the long haul.

This is my view only, but I think that one doesn't protect one's capital by suspecting trouble and then running the other way like Chicken Little and sitting in CD's. You look the risk in the eye, decide whether it's unmitigated danger or a manageable opportuity, and only then either back off or do the trade. Interest-rate risk, which is only one of several hundred ways to impair your capital, cannot be avoided, but it can and has to be managed. Bear funds, when used properly and appropriately, are some ways to manage that interest-rate risk that don't get the attention they would merit if investing were a totally rational process, which it isn't, because of the way human beings are hard-wired.

Obviously, the easiest way to manage interest-rate risk is to hold individual issues until maturity, which, as a bond investor I'm doing. But the trader in me sees a possible fixed-income opportunity and wants to capture it. In '94 I didn't have the capital to manage the risks. This cycle I do. The next cycle, 5-10 years away, I'll be positioned to use debt futures, in an ever increasing schedule of learning how all of this stuff works.

My goal? Simply to be the best well-rounded investor I can be, and not trading the short side is ignoring half the market.

Charlie
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>> Charlie, do you feel pretty comfortable shorting the long bond now? That is, do you feel confident that the downside potential for this approach is relatively limited at this point? <<

I can actually see someone who is about to go through the mortgage process use something like this as a hedge. If rates go up while they're waiting to lock, at least they'll have an investment that makes up for their increased payments...

#29
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