Friday 10 May 2013

When QE stops ... the Long Bond drops

Friday 10th May 2013

As far as I can infer, shorting the US Long Bond (US1 Comdty) is some of the easiest money to be made. The main uncertainty is determining precisely when it takes the plunge. Enter the Federal Reserve Bank of Chicago President, Charles Evans. Yesterday Charles said the US job market is “doing better”. He went on to suggest that were the labour market to continue to perform strongly, then QE would be ended abruptly rather than tapered off. Further, given the aggression with which it yesterday got shoved back down from $147, that seemed to provide a clue as to where it wants to go. So I rang up Jackie at ETX and sold short at $146.8. When QE stops, the Long Bond drops. Where it drops to is the question. I would posit $120 for starters. From what I can see there is at most $4 downside to $26+ upside on this and even that may be conservative. The risk/reward is ever so asymmetric. 

US Long Bond
Source: Bloomberg
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