Treasury Bonds: How To Profit From The Outrageous US Debt Crisis

| April 15, 2011 | 0 Comments

Last week was the 150th anniversary of the American Civil War.  As an avid student of history, I spent a lot of time re-reading parts of several books I have about the conflict.

I also watched Ken Burns’ terrific documentary on PBS.  If you haven’t seen it, I highly recommend it.

As I watched the recounting of battle after grisly battle, I had to admire the courage of soldiers on both sides.  These incredibly brave men would march headlong into a veritable sea of artillery shells and rifle fire.

It’s no wonder more soldiers were killed in the Civil War than in all other American wars combined.

They remind me of another group of fearless people… the millions of brave individuals buying US Treasury bonds.  These courageous individuals keep buying Treasuries no matter how dangerous the threat to their hard earned wealth.

The problem is courage alone is no shield against the monumental US debt and habitual overspending.

We need to face facts… we’re in the midst of a potentially fatal debt crisis.

The US national debt is fast approaching $14.3 trillion.  That’s a whopping $45,939 for every man, woman, and child in the country.  And this outrageous debt is growing larger by the second.

The good news… our Congressional leaders insist they’re finally ready to do something about it.  The bad news… the promises to restore fiscal sanity are just more empty political rhetoric.

Just look at how the 2011 budget fight went down…

Republican initially called for spending cuts of $61 billion.  But Democrats argued that was too much.  With a government shutdown looming, both sides finally reached an agreement at the eleventh hour.

The result…

Budget cuts totaling $38.5 billion… a tiny drop in a massive bucket.

When all is said and done, the 2011 budget calls for discretionary spending of $1.05 trillion and creates a deficit of $1.5 trillion.  That’s the largest spending plan and budget deficit in US history!

The never-ending party in Washington goes on… and while you’re not invited, you get to pick up the tab.

But here’s the real kicker…

These numbers only tell you a very small part of the debt crisis story. You see, the budget battle centered on discretionary spending, which makes up just 25% of the budget.  The remaining 75% is non-discretionary, entitlement based spending.

If you add in the cost of entitlements, our total budget for 2011 is a whopping $3.5 trillion.

Now those hard won budget cuts look like an even smaller drop in a much larger bucket.  In fact, if we somehow were able to eliminate all discretionary spending, we’d still end up with a deficit of almost $700 billion.

Entitlement spending is clearly the driving force behind our skyrocketing debt.

And here’s the worst part…

The $14.3 trillion debt figure doesn’t even come close to approximating the true debt burden.  To get a more accurate estimate, we have to factor in the unfunded liabilities for Social Security, Medicare, and Medicaid.

According to Mary Meeker (former star tech analyst at Morgan Stanley now with Silicon Valley venture capital firm Kleiner, Perkins), the unfunded liabilities are as follows:

  • Social Security   $7.9 trillion
  • Medicare           $22.8 trillion
  • Medicaid           $35.3 trillion

Add these all up and you get total entitlement unfunded liabilities of $66 TRILLION!

That works out to a stunning 500% of GDP.

Clearly our nation’s finances are in much worse shape than most people realize.  And the idea we can somehow grow our way out of this deep hole is really nothing more than a pipe dream.

The only way we can truly hope to resolve the debt crisis is through comprehensive entitlement reform.  And if the recent budget battle is any guide, it doesn’t look like Washington has the guts to do it.

So, what does this mean for Treasury bond investors?

According to Bill Gross, the world’s top bond trader, Treasury bonds are primed for a fall.  In a recent note to investors, the “Bond King” said this:

“[I have] been selling Treasuries because they have little value within the context of a $75 trillion total debt burden… Unless entitlements are substantially reformed, I am confident that this country will default on its debt [but] not in conventional ways…”

What does he mean by an unconventional default?

He’s referring to the government’s intentional yet deceptive policies fostering inflation, currency devaluation, artificially low interest rates, and Treasury yields far below historical levels.  In other words, Gross sees the US government continuing to pay artificially low interest to bondholders for as long as possible.

And Gross has had enough…

You may recall I wrote about the recent moves Gross made in his $236 billion Pimco Total Return Fund (PTTRX), the world’s largest bond fund, in my article Get Out Of Long-Term US Government Bonds Now!.  In the article, I explained how Gross had sold every last long-term US government bond out of the fund’s massive portfolio… an eye-popping $25 billion worth.

Well, that was just the first step in a much larger plan…

Now Gross is placing bets on Treasury bonds heading south.  Word is Gross is shorting long-term Treasuries to the tune of $7 billion.  I’d wager Gross did not take a position like this lightly.  He must be pretty confident Treasuries are headed for a big fall.

And you too can profit from the outrageous US debt crisis…

Shorting individual bonds is a difficult and costly maneuver for most individual investors.  Fortunately, there’s a simpler way to play this trade.

The ProShares Short 20+ Year Treasury (TBF) is an ETF that shorts longer-term Treasury bonds.  With almost $1 billion in net assets, TBF is a large and liquid inverse ETF.

If you’re looking for a little extra firepower, check out ProShares UltraShort 20+ Year Treasury (TBT) ETF.  This fund also shorts longer-term Treasury bonds, but it uses leverage to provide double the return.

And if you fancy yourself a Riverboat Gambler, you might like Direxion Daily 20+ Year Treasury Bear 3X Shares (TMV).  This fund seeks to provide triple the downside return on longer-term Treasury bonds.

Take a page from the Bond King’s playbook.  With these inverse ETFs, you can easily profit from the coming drop in Treasury bonds.

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Category: Bonds

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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