Treasury Prices Can't Hold, but Energy Will Rise Again

Last night over cocktails here on Siesta Key, there was a lively discussion about where the markets and economy were headed. The consensus view seemed to be one of confusion, with no one holding a firm opinion. Some felt we were at or near a bottom, while others (including yours truly) said it was too soon and saw more downside ahead.

Several of the locals participated in the discussion, including a former hedge fund manager. They had a consensus on the local property market: too much supply, with more entering every day, for prices to firm anytime soon. I have said all along that until property prices stabilize the economy and market cannot recover or rally, so this does not bode well for the next several months.

The whole group reached agreement on a couple of key points. First, the recent activity in the Treasury market is a bubble. The trade of the day right now is in favor of safety and liquidity, and this has pushed Treasury prices to unsustainable levels. While the deepening recession may keep talk of deflation in the headlines for awhile, eventually inflation will return -- too much money is being pushed into circulation around the globe.

Another source of pressure on Treasury prices is going to be supply. We have almost $1 trillion of commitments under the already-announced bailout packages. The incoming administration is talking about Keynesian stimulus programs to create jobs and prop up the economy, which will create additional financing needs that can only be achieved by issuing new paper.

In the long run, Treasury bond prices are going to fall. I am slowly building a small position short the iShares 20+ Year Treasury Bond (TLT - commentary - Cramer's Take). There will be some short-term upside in bonds as the Treasury and Fed continue to announce bond buybacks and rate cuts in the near future. I will use some of these strong rallies in bonds to increase my position over time. My goal is to end up averaging into a large short Treasury position.

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At the time of publication, Melvin was long RDC and short TLT, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid-Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.