As we noted in our article last week, we have had strong reasons technically as well as from a macro perspective to be bullish on the ProShares UltraShort 20+ Year Treasury (TBT) since its low just under 33 on September 7.
And the TBT has continued to rise since then. It gapped up Wednesday to $35.50 from Tuesday evening's close at $34.46.
The upward thrust occurred just in advance of the unveiling of the President's Tax Reform Plan (Wednesday at 3 PM ET), so we have to couch its bullish action under that umbrella. But with lower taxes for most individuals and businesses and a one-time business foreign repatriation tax-break being reasons to anticipate an increase in spending, infrastructure, and investment, higher interest rates likely will be a bi-product of such a policy mix -- if tax reform becomes law.
However, counter arguments to the plan will be many, including the budget deficit and any increase in our $20 trillion national debt. Suppose this plan is considered a budget-buster by the Democrats and even some Republicans ... then what? In that corporate profits are the highest in history, and in that the economy is growing at 3% in the absence of significantly rising business investment, why should we think that a tax cut that produces even more profits will be funneled into the economy? Maybe the money will be used for more financial engineering, stock buybacks, etc?
Be that as it may, it seems to me that the recent sharp upmove in TBT (longer-term YIELD) just after Fed Chair Yellen tells us that the Fed has no idea why inflation has failed to respond to QE or the rise in the labor market, is a reflection of the potential for budget-busting tax reform obscured by all sorts of smoke and mirrors -- such as, "the economy will grow at 4% or more, thereby bringing in gargantuan tax receipts."
Whatever the underlying trigger for higher rates (to be determined when the proverbial dust settles), my longer-term technical work continues to indicate that a new bull market in YIELD (TBT) started at the July 2016 low at 1.32%, which ended the 35-year bear market, and now is entering a new upleg after a Dec- Sep correction.
The daily chart of TBT (linked below) shows Wednesday's breakaway up-gap that has hurdled the March-Sep resistance line at 34.95, and which so far has followed-through to 36.00 in route to a challenge of powerful resistance lodged between 36.40 and 37.20. If or when that area is taken out, it should trigger upside potential that should revisit the Dec 2016 and March 2017 highs (42.28/98).
See charts illustrating the technical pattern on the TBT and Yield