Covering Schwab, Thoughts on Rates

In case you havent noticed, 10 year treasuries have had a huge move since early November. From 2.4% to 3.3% today. May not sound like much but thats a 10% price drop this quarter to date in long dated treasury bonds. What is interesting is that for the first time, perhaps ever, I am reading in the paper that treasuries are off on US debt concerns. For awhile I have been noting how heavy our countries debt load is, yet the market has ignored this for some time. (Goldman Sachs front running the Fed in my opinion!) Fed has been a huge buyer (via QE) and now owns ONE TRILLION dollars of our govt debt. However, it seems "bond vigilantes" are back. With our govt now cutting taxes in the face of 10% deficits, bondholders are rightfully getting nervous. We are the ONLY G20 country in the world still intent on stimulus and increasing deficits. All others are implementing changes to improve their fiscal situations, not implementing stimulus, which isnt really helping except to create asset bubbles in stocks and commodities.

I bot some TBF (short 10-20 yr treasury ETF) back in November, and hope some of you did too. Its still a great risk reward trade long term. I think with effective tax stimulus next year, Fed easing still, rates will keep moving up. I also have a long-short trade on in AMTD (long ameritrade) against SCHW (short Schwab). Lots of reasons, diverse multiples (13.5x v. 19x), daily avg trading revenue is growing 15% at ameritrade vs 5% for Schwab, identical ROEs (the most important metric)....both benefit however as rates move up. (and really, a year out, rates are heading to 4-5% on the 10 year).

Either way, I am covering the SCHW part of my trade and staying long Ameritrade. Its good if rates keep moving up. So far looks like i am up 15% in amtd, and down 8.7% in Schwab, so its been a good market neutral return of 7%. Both stocks are breaking out, so I am stop lossing the short side.

Side note: while the market seemed on a pretty decent uptrend, we had a bearish reversal late afternoon yesterday. Many democrats are opposing the tax deal that Obama agreed to, and it spooked the markets around 2:30pm. Hard to be heavy long or short with this kind of ambiguity. Obviously US bonds are a bad idea, muni's too. But its not so clear directionally where stocks are going. I am still 30% long equities though, generally I think its more likely our govt stimulates, cuts taxes and spends more in 2011. Its all we know.