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Where do Interest rates go from here?

So Jason and I recently attended the traders expo in LA this past week and had the opportunity to meet a few of the people that we talk to in the online trading community. It was really nice to put some faces to names. We also had the pleasure of meeting a few new contacts that will beneficial going forward. One such person is Tom Sosnoff of Think or Swim. During his presentation he brought up interest rates in the United States. He started off by asking the audience "How many of you think interest rates go down more" (most believed interest rates were going up), in my head and under my breath I said they really could not go down from 0%. I do realize however that this is just the short term fed rate and all other interest rates are based on this number plus some spread. But my main thought was that I didn't think there was much more downside in interest rates on longer dated treasuries like 20 year. Next Tom asked "How many are short bonds?", and 1 person out of 400 raised their hand. To me Tom was asking all of the right questions. Anyways to make a long story short I liked the idea of getting short bonds via the TLT which tracks the 20 year treasury index put out by Barclay's.

So I did a little homework to see how well this ETF tracked the index and ran the numbers back to January of 2007 for both the rates on the 20 year treasuries as well as the performance of TLT over the same time period and constructed the chart below. I basically was looking for a mirrior image when plotting the TLT vs the 20 year interest rate. I got exactly that:



So to me this helped me decide that the TLT would be a great product to make a play on interest rates. Next I crunched some numbers to see what the average move in TLT was for each move in the 20 year rate. Since 2007 TLT has moved about 13 times the move in the underlying interest rate. I wanted to calculate this to try to help come up with some price objectives on a increase/decrease in the 20 year rate with respect to the price of TLT. The 1 standard deviation was about 8. So 68% of the time I could expect the TLT to move at least 5 times to 21 times the movement in the actual interest rate.

I would like to take a short position in the TLT ETF but will need a little more time to construct the trade. I just wanted to get this analysis out of the way. What do you think of this trade and interest rates in general? What might I be missing in this analysis?

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