As I noted last week, we've had strong reasons technically, as well as from a macro perspective, to be bullish on the ProShares UltraShort 20+ Year Treasury (NYSE:TBT) since its low just under 33 on September 7.
And the TBT has continued to rise since then. It gapped up on 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 as reason 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 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?
Don't Believe It
Be that as it may, it seems to me that TBT's sharp up-move (longer-term yield) just after Fed Chair Yellen told us she has no idea why inflation 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 is now entering a new up-leg after a Dec.-Sept. correction.
Resistance To Watch
TBT's daily chart shows Wednesday's breakaway up-gap has hurdled the March-Sept. resistance line at 34.95 and has so far followed through to 36 en 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).
