Tuesday, December 7, 2010

Bond Short

I usually don't call much attention to my stock portfolio but wanted to share a recent move. First, you can follow all of my trades and my performance on Covestor. I've been lucky in recent years and have returned about 70% since March 2008 while the stock market is at -10%.

I've been watching the Bond market for a long time because I think eventually all the money printing that the Fed is doing is going to hurt us. Eventually, I think Foreigners will get tired of buying our bonds, knowing principal value of those bonds will be devalued by the inflation the Fed is trying to generate. Once they realize that, foreigners will stop buying bonds (this has already started to happen) and bond prices will fall to reflect the reduced appetite. When bond prices fall, the implied interest rate on bonds rises. The Fed is fighting this though by buying bonds themselves. The Fed is very powerful in financial markets and will be able to sustain buying bonds for a long time. Therefore, betting on falling bond prices will likely take a very long time to play out.

Today I stuck my toe in the water and bought a tiny amount of TBF, a short bond fund that has no leverage (TBT has leverage but the leverage chews up your principal if you are not immediately correct). It's a very small amount, designed to get myself to pay even closer attention to the bond market. Now I have a little stake in the game and will pay more attention. Just wanted to get this on your radar screen too.