The Long Dollar / Short T-Bond Trade is Starting to Breakout

Back on September 13th we said:

“The problem is however, that long-term interest rate markets are now edging into a command position to take over leadership with higher interest rates, regardless of what Ben does at this point.  If you are in the markets, watch the dollar/bond ETF ratio, ie the UUP/TLT ratio, it is set to turn up for the dollar and down for the t-bonds.  This could be the trade of a lifetime, at least mine.”

That trade is showing signs of breaking out, and not in a way that many might have expected.  The dollar has been under pressure during this breakout, but the T-Bond has been under more pressure.  Consequently the ratio is swinging in the right direction.  Keep in mind this is a long, long, term trade, at least 15, probably 30 years.  The way most traders operate these days, the horizon will be way to long. The short-term fluctuations will no doubt be substantial, like right now the ratio is vulnerable to a short-term back-off as bonds have dropped a lot in the last few days.  The important fact is that the turn has been made.

Implementation of this trade involves the long dollar ETF “UUP” and the short T-Bond ETF “TBT”.  As you can see on our Position update of 9/30/12 on the Home Page, we are, based on face value,  short about 3.5 times as many T-Bonds as we are long dollars.