Time to Attempt the Reverse Long Term Capital Management: Long Treasuries/Short Junk? (TLT; TMF; HYG; JNK)

The first time we posted this we got lucky and caught 19% (actual, not annualized) in thirteen days, unleveraged. I'm not ready to pull the trigger in the next few minutes but we're close.
TLT   $120.35
HYG $96.27
JNK $41.94
Come on Flight to Safety!
First posted July 26, 2011:

Attempting a 2 1/2 twisting Meriwether, not that high a Difficulty score, so to pull it out the execution must be flawless.... 

...And yes! He sticks the faceplant landing!

Stuff I think about when dreaming up relative value and convergence trades.

LTCM was shorting the more liquid on-the-run treasuries and buying the less liquid off-the-run to catch a few points or shorting treasuries and buying other sovereigns. It worked until Russia defaulted and the crowd did the flight to quality thing: spreads blew out and it was game over.

Here's what Scott Grannis thinks about at Calafia Beach Pundit:

I was probably too cavalier this morning in my dismissal of the risks of a Treasury downgrade. In discussions over lunch today with my most excellent former colleagues, Steve and Ken, I came to appreciate the deep concerns that hover over the institutional bond market community. My point this morning was that a downgrade of US Treasury debt is essentially a downgrade of all debt—since Treasuries are the bedrock upon which all debt is priced—so a downgrade doesn't really mean much....MORE

Ha!
No Noble Laureates were injured in the performance of these mental gymnastics.