It’s hard not to notice that Treasuries have taken to new heights. There were many comments about bonds being overpriced back when TLT was trading at 100, yet now it’s over 20% higher.


It’s worth turning to Hussman for some perspective. Here are some extracts from his recently weekly commentary.

…If the Fed ends up buying long-term Treasuries, it will almost certainly be a bad trade, but it may be required in order to absorb the supply from foreign holders set on dumping them.

And for good reason. The panic in the financial markets in recent months has driven Treasury bond prices to speculative extremes. Unfortunately, unlike the stock market, where hopes and dreams about future cash flows can often sustain speculative markets for years, it is very difficult to sustain speculative runs in bond prices. The stream of payments for bonds is fixed and known in advance. For foreign investors holding boatloads of U.S. Treasuries, the recent rally in the U.S. dollar, coupled with astoundingly low yields to maturity, have created a perfect time to get out.

In the next several months, we’re likely to observe one of two things. If the dollar holds steady, Treasury bond prices are likely to plunge; if Treasury prices hold steady, the value of the dollar is likely to plunge. Either way, foreign holders of Treasury securities are facing probable losses, and they know it.

Those of us interested in trading a fall in Treasuries can use TBT to get 2x the inverse return of long term treasuries. I’m waiting for a turn in price trend before jumping in.

Also worthy of noting is Hussman’s analysis of the foreclosure trends…

…I expected the second, third, and fourth quarters of 2008 to be the ?heavy hitters? in terms of foreclosures, with the foreclosure rate peaking between about November 2008 and January of 2009. I continue to believe that the foreclosure rate is currently near its peak, and will ease as we move through 2009. However, I also noted that a second spike of mortgage resets will occur the third quarter of 2010, which means that the foreclosure rate (and associated loan writedowns) will most probably pick up again in the first quarter of 2011.

We might well see some improvement in the foreclosure rates (improvement = less acceleration of the trend on the downside), so consider this fair warning so you’re not amongst those genuinely surprised.