Make Money Trading U.S. Treasuries

NEW YORK (TheStreet) -- U.S. Treasury yields have been declining since the new millennium began. With yields at or near record lows, there's a misperception about the U.S. Treasury market among Wall Street analysts and by investors. Most strategists have told investors to avoid U.S. Treasuries over the past few years because of what they describe as a bond bubble. They assume that investors just buy and hold bonds to maturity.

I have not been in the bearish camp for Treasuries given the opportunities to "buy and trade." Yields are reluctant to rise significantly as long as the Federal Reserve keeps its pledge to keep the federal funds rate at zero to 0.25% until late 2014. The FOMC cut the funds rate to zero to 0.25% in mid-December 2008.

Like stocks, I do not believe that you buy and hold Treasuries in this investment environment. Traders and investors should consider a Treasury bond as a security to buy and trade just as they do in the stock market.

Trading U.S. Treasuries

The benchmark U.S. Treasury is the 10-year note. New issues are auctioned in February, May, August and November. In between, the prior issue is re-opened at additional auctions. Auctions are awarded via a "Dutch Auction" process where all winning bids are awarded at the highest yield that clears the auction size. Individuals can purchase at the auction price with a noncompetitive bid for up to $5 million in face value.

The yield on the 10-Year U.S. Treasury traded as low as 2.016% in December 2008 after the Federal Reserve cut the federal funds rate to zero to 0.25%. This decline was anticipated by the bond market and the yield rose to 4.013% the week of April 4, 2010. This was a clear buying opportunity because the 10-Year note was testing its 200-week simple moving average at 3.975%.

A U.S. Treasury trades like a stock with a price that moves up when the yield goes down and goes down when the yield goes up.

Chart Courtesy of Thomson / Reuters

The weekly chart for the 10-Year U.S. Treasury is positive, which is the technical pattern that favors lower yields. My proprietary analytics shows that traders and investors book profits with this yield declining toward my monthly yield risky level at 1.734. My annual value level is 2.502 with a semiannual pivot at 1.903. The 200-week simple moving average is the longer term yield downtrend and that yield is 3.013. The "buy and trade" strategy thus tracks the downward trend of the 200-week simple moving average.

If you want to trade Treasuries like a stock I suggest the iShares Barclays 20+ Year Treasury Bond Fund ( TLT). Here's a look at the daily chart.

Chart Courtesy of Thomson/Reuters

The daily chart for TLT is positive but overbought. Notice the range that can be traded. Buy weakness to the 112/110 range and sell strength to 122/124. The range between 110 and 124 captures volatility of 12.7% This "buy and trade" strategy three time over the past 52 weeks Within this tradable range are annual and semiannual pivots at 116.28 and 113.32 and weekly and quarterly risky levels at 121.16 and 122.51.

Conclusion: As you can see on the chart there is no indication of a bond bubble and that TLT trades just like a stock, and at current levels its time to book some profits.

With my "buy and trade" strategy, you are always adding to positions on weakness to a Value Level and reducing positions on strength to a Risky Level. This is not labor-intensive. You simply enter "Good Until Canceled" GTC Limit Orders to buy at the value level and sell at the risky level. A "buy and trade" strategy allows you to capture the price volatility as stocks move up and down.

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