Reasonably Thinking

Back in September, I discussed the paradox of the US debt rating downgrade causing the US 10yr yield to fall.  Through parity relationships, we normally would have expected interest rates to rise.  My action at the time was to short US Treasuries by shorting the IEI ETF, which corresponds to the 3-7 year portion of the US Treasuries curve.  My thesis centered on the idea that economic malaise and/or currency devaluation would not be tolerated.  We see flashes of this with protestors in the occupy movement and rhetoric on the primary campaign trail.  However, I’ve realized that I am too early here.

I recently wrote in the inflation/deflation debate, that “For rates to rise, the US dollar would likely need to lose a significant value relative to other currencies.  At the very least, shorting Treasuries seems imprudent in the short run.”  While I believe shorting US Treasuries will be profitable in the long run, this trade is too early.  The current situation enables both US Treasuries and gold to perform concurrently.

Hence, I covered my short position today at a small loss, mostly attributable to transaction costs.  I may use the freed up margin to initiate other short positions in the near future.