Short Treasuries Trade Developing

Lackluster demand for Treasuries this week has investors fleeing the bond markets sending yields to their highest levels in months. While the Federal Reserve has kept a lid on the short end of the curve, the long end is steepening. Bernanke may be forced to chase the long end up if demand for US government debt continues weakening. If GDP readings continue improving and the unemployment rate ticks down further, Bernanke may have a difficult time justifying the continued ultra-expansionary policy.

The exchange-traded fund that corresponds with the Lehman Brothers 20+ Year U.S. Treasury Index (TLT) broke through long-time support today. Equity traders can short TLT as a proxy for the bond markets after today's drop below $88.80 signals a close below support.

Yet, caution is necessary considering the technical landscape on the 30-year Treasury bond futures. The futures paint a slightly different picture as the two days of selling have brought T-Bonds into long-time support at roughly $114.23. While the TLT may have broken through, I think it is more instructive to understand the underlying for technical interpretation. I am waiting for a close in the future below this level to be fully confident in the short Treasury trade.

If this trade materializes, the major support level in the TLT comes in at $82.50. The 3-year weekly chart below shows no significant support until this level. This likely takes weeks to play out but could offer a profitable opportunity.

Disclosure: Short TLT.