#$tmv

Historically speaking, there is a respectable seasonal tendency for the 30-year Treasury bond to decline in price from late-January until the end of April (shaded in yellow in chart below) sending interest rates higher. Shorting the June 30-year Treasury bond futures contract on or about February 5 and holding until around April 10 has successful 23 times in 37 years. However, this trade has been a loser in six of the last eight years. This year could snap the losing streak.

After breaking out to new all-time highs in mid-December, iShares 20+ Year Treasury Bond (TLT) appears to have reached a peak in late-January. In the following weekly chart of TLT, weakness is being confirmed by falling relative strength, a Stochastic sell signal and soon a MACD sell signal. Given the magnitude and pace of TLT’s ascent before its breakdown, TLT could easily trade back down to the $117-$120 price range especially if the geopolitical stage remains relatively calm.

Typically, we see a seasonal tendency for 30-year Treasury bond prices to peak in mid-November to mid-December and then start a decline lasting into April (highlighted with yellow box below). Perhaps investors seeking a higher return feel more comfortable buying into the year-end stock market rally, so they sell bonds and reallocate funds into equities. Or perhaps end-of-year window dressing or savvy traders, wishing to take part in the up-coming January effect, play a role in the decline of bond prices. 

In any event, this trade in the last 37 years has a 51.4% success rate. This trade’s shorter-term record is even weaker with five losses and just two wins since 2007. Losses in 2007 and 2008 were the result of recession and financial crisis. In 2011 and 2012, the Fed took action to drive longer-term interest rates lower (bond prices higher) and Europe’s debt crisis triggered a flight to safety as well.

However, the Fed has ended QE because U.S. growth and labor market conditions have improved substantially and should these trends hold the Fed’s next move will be to raise interest rates. Higher rates translate into lower bond prices for existing supply. As of today, a Fed Funds rate increase is most likely going to occur in the second half of 2015, but could come sooner if economic conditions remain firm and positive. 

Traders may consider shorting the exchange-traded fund iShares Barclays 20+ Year Bond (TLT) or trading its put options as a replacement for the futures contract. Another possibility is establishing a long position in Direxion Daily 20+ Year Treasury Bear 3x (TMV). This fund seeks to track three times the inverse of the daily move of the NYSE 20+ Treasury Bond index. TMV had been in decline since the start of 2014, but appears to have found bottom in mid-October.