Dollar And Treasuries: Dichotomy

Let's take a closer look at behavior of dollar and treasuries lately. Here I mused that treasuries are pointing to financial panic, when dollar isn't.

On the graph below UUP, is a proxy for dollar, compared with TLT, long-term treasuries ETF. Y axis is a percentage change of these ETFs since July 1 of this year.



Vertical lines split this chart into 4 periods. As we can see, in the first period, from July 1 until about October 6, both dollar and treasuries moved slowly up. My idea at the time was that world was running scared from all asset classes into US Treasuries, buying a lot of dollars along the way. That would be worldwide financial panic.

Then we have period from October 6 until October 24. Treasuries were moving sideways and a little bit lower, but dollar was in a parabolic rise. Was it dollar carry trade unwinding?

Next period, between October 27 and November 17. Both ETFs trade in range.

And the most interesting part, after November 17. Dollar still trades in range, but we have rapid, insane rise in treasuries. Coupled with failures to deliver, this amount to real panic buying. What's happening? We can't attribute this to the international buyers, because dollar is not rising. My best guess is that funds of different kind (endowment, sovereign, state and companies pension etc.) are moving into treasuries from other asset classes. They already lost hundreds of billions (maybe trillions) of dollars on stock, bond and commodities markets. Looks like now they are investing in the safest paper possible. Trouble is, at these price levels, treasuries are lousy investment. You need to hold them for decades to get any kind of return.

Can we make money off this? Doug Kass thinks it's time to short treasuries, for example here. He is currently short TLT. I don't want to do it, yet. First of all, it's dangerous to short bubbles. Second, failures to deliver probably keep a lid on the prices, which can go even higher. Last, but not least: treasuries prices are at Great Depression levels right now. If we are in GD 2.0, they might remain at high levels for a long time. I will be watching for inflation data. If we start getting any inflation at all, then it's time to short treasuries. If we get into depression, then time to short will be when this fact is accepted. I'll short when I see New York Times headline "Great Depression II!".

Full disclosure: at the time of publication author had no positions in UUP, TLT or any other stocks related to treasuries. Positions can change any time.