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How to Profit From Front-Running the Government Bond Auctions

Interest-Rates / US Bonds Jun 15, 2009 - 03:13 PM GMT

By: DailyWealth

Interest-Rates Best Financial Markets Analysis ArticleTom Dyson writes: Front-running is illegal.

Here's how it works: A crooked broker receives a large order from a customer. Before he executes the customer's order, he'll buy the stock in his own account. The customer's order pushes the price of the stock up and gives him an easy profit.

Today, I'm going to show you how to "front-run" the U.S. government. This trade is not illegal. The information we'll use is public, not "inside" information. But the profits are just as easy... As I showed you in an essay last week, the Treasury sells around $165 billion bonds each month to pay for the government's spending plans. It auctions these bonds on Tuesdays, Wednesdays, and Thursdays in the second and fourth weeks of the month. In that essay, I showed you how to trade these auctions each month. Today, I've got a slightly different twist, which I think will end up being more profitable...

To make money, all you have to do is front-run the Treasury's sales of bonds. In other words, you sell short bonds just before the auctions begin on Tuesday, and then cover your short after the last auction on Thursday. Repeat every two weeks.

Normally, strategies like this don't work in the financial markets. Traders mark down prices in advance of the auctions, so there's no benefit to front-runners. But in this case, my guess is, the Treasury's auctions are so large, they are bludgeoning the market lower, despite the traders' moves.

Take the most recent "front-running" trade as an example. Between Tuesday, June 9, and Thursday, June 11, the Treasury auctioned $65 billion in three-year, 10-year, and 30-year bonds.

The UltraShort 20+ Year Treasury ProShares (TBT) is the ETF that rises when bonds fall in price. It opened at $56.58 on the morning of the first auction and closed at $57.72 the evening of the last auction. Government front-runners made 2% in three days.

You could have put on this trade 12 times in the past six months, and you would have profited eight times... with an average gain of 1.8% per trade and an average three-day holding period.

Front-Running the Government
Entry Date
Entry Price
Exit Date
Exit Price
Days Held
Dec 22, 08
Dec 23, 08
Jan 6, 09
Jan 8, 09
Jan 26, 09
Jan 29, 09
Feb 10, 09
Feb 12, 09
Feb 24, 09
Feb 26, 09
Mar 10, 09
Mar 12, 09
Mar 24, 09
Mar 26, 09
Apr 7, 09
Apr 9, 09
Apr 27, 09
Apr 29, 09
May 5, 09
May 7, 09
May 26, 09
May 28, 09
Jun 9, 09
Jun 11, 09
Average Gain
Buy TBT at the open price on Tuesday and sell at the closing price on Thursday, auction weeks only.

It may not sound like much, but compounding your money at 1.8% every two weeks turns every $1,000 you invest into $1,530 in one year. That's a 50% gain with just a handful of tiny trades. And with leverage, the gains would be even greater.

This week, there are no Treasury auctions... and TBT is falling. The next auctions are next week, starting Tuesday. To front-run the government, buy TBT first thing on Tuesday morning June 23 and then cover your position late on Thursday evening. Repeat every two weeks.

Good investing,


P.S. Click here for a link to the schedule of government bond auctions.

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2009 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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