If You’re Looking To Sell Your US Treasuries, Now’s The Best Time

Two weeks ago, GM declared bankruptcy… and the S&P 500 (^GSPC) rose 2.6% - one of the best rallies of the year - after the news came out.

How could the stock market rise the same day as one of the world’s largest and most important companies declared bankruptcy?

It’s simple. The stock market already suspected GM would declare bankruptcy… so the news came as no surprise. As traders say, the bad news was already “priced in.” Monday’s rally was almost like a sigh of relief from investors that this saga had ended.

Business-school teachers will tell you the stock market is efficient. What they mean is, you can’t make money using public information to make trading decisions. Most of the time, that’s true.

Here’s the thing: Occasionally, the market loses its efficiency and you can make money from public information. I’ve found one of those situations in the government bond market. Today, I’d like to share it with you…

Two major players are at work in the government bond market right now: the Treasury and the Fed. The Treasury sells $200 billion in bonds and notes every month… mostly in the first and last week of each month. The Fed recently started buying bonds. Last month, it bought $50 billion… spread evenly throughout the month.

You wouldn’t think the Fed’s purchases and the Treasury’s sales would affect government bond prices on a day-to-day basis. There’s nothing surprising about either the Treasury or the Fed’s activities. Their moves are predictable, routine, and transparent. Both agencies post their intended buys and sells on government websites well in advance. (The calendar for Treasury issuance is available to the public at the Treasury’s website here. And you can see the Fed’s purchase schedule here.)

The market should anticipate these transactions weeks before they actually take place. But that’s not what I’ve found…

I’ve noticed the bond market falls at the beginning and end of the month, under the pressure of the huge government issuance. But in the middle of the month, when the Treasury’s issuance dries up but the Fed is buying, prices rise.

If I’m right about this relationship, to make a profit, all you have to do short Treasury bonds before the big Treasury auctions of the two-, five-, and seven-year notes around the fourth week of the month and then cover your position after the Treasury auctions the three-, 10-, and 30-year bonds around the second week of the following month.

If you’d followed this strategy for the last six months, you would have made money six times out of six trades… generating an average 3.34% profit per trade with an average holding period of 19.5 days. That’s an annualized gain of 62.5%.

In the last week of May, the Treasury auctioned $101 billion in two-year, five-year, and seven-year bonds. It was the largest three-day issue of government bonds in history. And this week, the Treasury will auction another $65 billion in three-year, 10-year, and 30-year bonds… another huge auction.

Bonds have cratered in the last 10 trading sessions under the weight of this huge supply. But over the next two weeks, between June 11 and June 23, the Treasury won’t auction any bonds. If this year’s trend continues, bonds prices will rally over these two weeks. If you’re trying to unload a position in Treasuries, that’s the best time to do it.

You can also trade the pattern… To play the rallies, buy the iShares Barclays 7-10 Year Treasury Fund (IEF). To play the declines, either short IEF… or buy the UltraShort Lehman 7-10 Year Treasury (PST), which rises when Treasury bonds fall.

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