Friday, July 29, 2011

Trade into the debt ceiling deadline weekend

My trade going into the weekend will be short bonds (TLT), long silver (SLV).  Judging by today's price action, these are hedged, since after news of still no-deal going into today, both gold/silver and bonds ripped.  The price action appears to be treating gold/silver as "safe havens" in this case.  However, gold/silver typically tracks equities somewhat, and any raise on the debt ceiling will be even more dilutive to the USD.  So if the market thinks of this aspect to gold/silver instead, it could rip, which is contrary to public opinion of what would happen.  Likewise, the price action in bonds today is treating USTs as a "flight to safety."  However, if no deal is done, the market could treat this as an additional credit risk, and USTs could actually tank, especially if they officially get their ratings cut.

So this is the scenario as I see it:
1) No deal: then I lose on bonds (with the potential that the market will actually treat bonds differently on monday than it did today by focusing on credit risk rather than flight to safety factors), win on silver
2) Deal: I win on bonds, lose on silver (with the possibility that I don't actually lose on silver, but that it instead almost tracks equities, which should rip)