By Jonathan Yates

Contributor, Stock Traders Daily -  Rule-Based Trading Strategies

Receive a free trading report for TBT, JPM, or PST by clicking the stock symbol in this article.  The real time report will be provided immediately.  It contains unbiased, risk-controlled trading plans for all durations.

(La Jolla CA)  “Pop” went the US Government bond bubble on May 27^th, with the sell off in Treasuries driving the yield for 10-years up to 3.69%, more than 70% higher from 2.07% in late December.  When a bubble forms in an asset class, issuers must offer higher yields to entice investors to buy their debt.  Poor results from the Treasury auction on May 7^th were a result of Chinese investors now buying only short term US debt, minimizing their exposure to the weakening dollar and maximizing the liquidity of their position.  The upcoming bursting of the bubble was announced in mid-March, when Chinese Premier Wen Jiabo expressed his concerns over the value of Treasury bonds due to excessive spending by Washington driving the dollar lower.

While The Dow fell 173 as Treasury yields rose, ETFs such as the Ultrashort 20+ Year Treasuries Proshares (NYSE:TBT) and the Ultrashort 7-10 Year Treasury Proshares (NYSE: PST) were strong, as investors expected interest rates to continue to rise.  TBT was up $2.07 for the day, a 3.76% gain.  Up $1.23, PST rose by 2.15%.  As the Treasury bubble continues to burst, these ETFs will gain further.

A bubble has been created in Treasuries due to US Government fiscal policies.  In the current fiscal year, $2 trillion must be borrowed.  This has the US Government competing with private investors for a finite pool of capital.  The Investment Rate, the most accurate forecasting tool which called The Great Depression and the stagflation of the 1970s along with the current decline from mid-2007, portends that New Money will decline.  “Contrary to popular belief,” noted Tom Kee, President and founder of Stock Traders daily, “New Money drives the Market, not old money.”  As a result, asset classes such as stocks and real estate will decline even more dramatically in the years ahead as liquidity withers. 

With the US Government needing trillions to finance its budget deficits and the biggest buyer in recent years, the Chinese, taking a step back, interest rates will have to continue to increase to attract investors.  These rising interest rates will draw capital, the New Money, away from the stock market, as investors lock in safe, secure yields from Treasuries, which still have a Triple AAA rating.  With high yields offered by Treasuries, stocks whose dividend incomes as a key component of their attractiveness such as utilities, real estate investment trusts, and financials will be hit particularly hard.  Financials exposed to real estate and consumer loans such as JP Morgan (NYSE: JPM), Bank of America (NYSE: BAC), and Citigroup (NYSE: C) will suffer more, as all fell sharply on the 27^th.

Looking for a trading strategy that will light up your portfolio? Check out dynamic real-time trading reports published by Stock Traders Daily CEO, Tom Kee Jr., with a Free Trial.

In 2008, Kee’s Stock of the Week selections returned 60.8%.