Intuitively the Fed's stated commitment to leaving rates unnaturally low until long after we're all dead and buried would make trading derivatives of government debt an exercise in futility. CNBC contributor and founder of Killir Kapital, Jeff Kilburg has found a way to profit from ignoring your instincts.
Using the iShares Barclays 20+ Treasury Bond ETF (TLT) Kilburg has been making money trading relatively slight changes in the yields. Kilburg says Bernanke's active approach to running the Fed is creating opportunity.
"It's a prudent play to be long the TLT because we have not figured out anything from a Fed perspective," says Kilburg in the attached video. What the Fed wants is short-term yields low and long-term money expensive. That means pushing down short term yields and what's called "steepening the yield curve".
In English, whenever the 10-year moves towards 2% the Fed pushes it lower. Translated into the TLT, the ETF has been moving to $130 when yields are pushed lower and the $120 area when the 10-year moves higher. Kilburg is playing the middle.
At the moment the yield on the 10-year note is 1.8% and the TLT is near $120. Kilburg's trade is buying the TLT here, selling near $130 and repeating the process until the trade stops working. Keep your stops tight, be disciplined about taking profits, and grind out your gains. It's a strategy built only for active traders but in this market most people will take what they can get.