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Don’t Touch That Treasury Bond!
Another week later, and Treasury bond prices have raced up to even dizzier heights, breaking more records for over valuation. According to the Investment Company Institute, outflows from equity mutual funds over the last two years totaled $232 billion, while inflows into bond funds soared to a staggering $559 billion.
Today, “bond funds” ranked with “Miss Universe” and “Lindsey Lohan” among Yahoo’s top ten search terms. Companies, like FedEx, are looking to issue corporate bonds maturing in 100 years. No doubt the prospect of 80 million baby boomers bailing on equities so they can become coupon clippers for life is providing some extra juice for this market.
In a Wall Street Journal article last week, the Wharton School’s Jeremy Siegel pointed out that ten year inflation protected securities (TIPS) with yields under 1% are selling at a PE multiple equivalent of 100 times, the same valuation that dotcom stocks saw a decade ago (click here at
http://online.wsj.com/article/SB10001424052748704407804575425384002846058.html?KEYWORDS=jeremy+schwartz ). Bonds with four year maturities have negative real yields.
The last time this happened, in 1955, ten year bonds brought in an annual return of only 1.9% for the following decade. The potential capital losses for these securities now loom large.
It looks like the smart money these days is found in China. While American investors have been scrambling over each other to buy more Treasury bonds at historically low yields, China has begun quietly unloading some of its own enormous holdings. In June, the Middle Kingdom sold $21.2 billion of paper, reducing its net long to $839.7 billion. This is little more than 10% of the total $8.18 trillion in federal debt that Uncle Sam has outstanding.
Total foreign ownership of US Treasury bonds amounts to $4 trillion, up from $2.4 trillion in three years. Instead, the Chinese have been buying Japanese government bonds, which today carry a paltry 0.9% yield, but have the merit that they are denominated in a rapidly appreciating currency. The Mandarins in Beijing have also been picking up a variety of bonds in Europe which have seen yields pushed to near records, thanks to the debt crisis there.
Officials at the People’s Bank of China say that it is all part of a broader diversification effort away from the greenback. PIMCO’s Bill Gross has apparently been taking Mandarin lessons on the sly because he has also been paring back his own massive holdings in longer dated Treasuries. To understand why, take a look at the chart below of the spread between the Dow dividend yield and the ten year Treasury yield which has turned positive for the first time in 55 years.
In the meantime, the short Treasury ETF (TBT) trades at $30.60.
Let me run some numbers here. If the yield on the 30 year Treasury bond runs up to last year’s low of 3%, the TBT will fall to a new all time low of $27. If I’m right, and we move back up to the 2010 high of 5.05%, the TBT pops back to $51.50. Running a downside risk of 11% to capture a potential gain of 68% sounds like a pretty good risk/reward ratio to me. But it might get better. Don’t forget that my long term, multi year target for this ETF is $200.
If the futures players get this right, a move in the December long bond (ZBZ0) on the CBOT from today’s high of 134.5 to this year’s low of 111.50 multiplies your minimum margin requirement from $3,375 to $23,000, a 6.8 fold return.
But wait, there’s more! If you don’t feel like making big bets until you figure out what the new normal looks like, try a limited risk position through the TBT options. The March $30 strike calls are trading at $4. A run up by the ETF to this year’s high puts these babies at $21 at expiration, a net profit of $17, a gain of 425%.
I’ll tell you some key targets to watch for to determine the timing on this: when the yen approaches ¥80, the S&P 500 touches 950, the 30 year yield tickles 3%, and the ten year yield slams into 2%, it will all be over but the crying. I’m still keeping my powder dry for taking another shot at this trade, but my trigger finger is getting mighty itchy.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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TIP's dont sell for 100X earnings. That's the yield before CPI bumps the principal in line with inflation. That's a pretax guarantee of beating inflation. Find a guarantee of beating inflation??? TIP's are one of the best investments in the universe on that note.
Correct though---- A 30 year T-Bond I wouldn't touch.
TBT may rise in price but the problem is the leverage and the daily rebalancing. All you need is +3% and down -3% daily (a mean average volatility distribution of interest rate movement) even as rates rise somewhat--- and you're going to lose your DERRIER while being correct on the direction of things. TBT might be a good "inflection point trade" but for long term investment it's probably going to go to a buck or so and then reverse split in order to keep the dream alive. The leverage and the daily reblancing are what kill this ETF as a "portfolio holding" vs a trading vehicle--- which it really is in the short term. Buy the call options if you can find LEAPS and spend less money on this one.
For the deflationist camp who believe in the JAPANIFICATION of the USA we would remind investors of the hyperinflationists in Japan some 20 years ago, still waiting and now broke--- along with their clients--- from shorting JGB's.
Shawn Mesaros, Pamria, LLC
Let's see if they (USTs) fill the gap first. Second, I'm uncertain whether Bunny dares to unleash QuereEasingDeux when food prices rocket away... Scratch that last sentence, of course he does, he's a douche. "Here yankee! have some more borrowed money - SPEND IT!"... Gonna be interesting to see how the USD reacts if bonds start to fall.
Given that Ben just told us that "if" slow growth fails to materialize "as expected", we will see more QE, I think this call is early at best, which is same as wrong.
yeah except that when they began QE1 bonds only sold off in that period..... sometimes its better to have travelled than arrive....
According to John Roque, the all-time low yield on the 10-year was 1.67% in 1945, or roughly 33% below today's "ultra-low" levels. Roque isn't forecasting a return to those thrilling days of yesteryear but notes the 10-year yield (at just above 2.50%) is currently higher than its most recent low of 2.2%, hit in the fall of 2008.
A run on the Fed?
Max Keiser's interview with Joern Berninger from yesterday’s On the Edge, air date 27 August 2010. {Please note – Dr. Berninger had serious audio problems on his end, so that any time he spoke for more than 30 or so seconds the sound would become inaudible, so he kept his answers very short. This is why Max spoke more than usual!}
http://maxkeiser.com/2010/08/28/ote70-on-the-edge-with-joern-berninger/
Refer to my post above. Although I wouldn't use the TBT either, this sucker is bound to come crashing down, and that is the one and only scenario where the TBT would work. Maybe a mix of shorting UBT (limited upside) and going long TBF (unlimited upside) could be interesting.
The market can stay irrational longer than you can remain solvent. Also, aren't leveraged ETFs a disaster waiting to happen? Would be a damn shame if you were right on the move, but couldn't collect.
My thought is to peel off profits on the way up, not sticking around for the climax. It looks like anything backed by banks have a glaring counter party risk. Feel free to straighten me out, I'm just a kid who wandered into the casino.
We are all entitled to our hyperbole but the statement about the keyword 'bond funds' being in Yahoo's top 10 top search results today or any day recently is bullshit it if you meant it as fact. I'm doing SEO all day long and it's not even on the radar, in Google either. Can you provide a link?
It's peripheral to your point I know but if you start out in an article making a claim like that it just looks cheap as hell if it's untrue, in my opinion. If you can provide a link I'll retract everything I said.
MHFT you might want to consider calls on the TBF instead. Leveraged ETF:s like TBT - you know it's all shite. Or potentially short an ultralong treasury ETF about to blow up. Candidates: UST and UBT. If the inflows have been as large as I suspect, there should be shares available to borrow. There are also options linked to these suckers - in case the trade goes awry.
Beginning to like the short idea, although I would like to object to your Yahoo! Search volume point. According to Google Trends we are a long way from the panic sustained in 08 http://www.google.com/trends?q=bond+funds&ctab=0&geo=all&date=all&sort=0
Good observation man. Where was "must own gold stocks" on the list....haha
Bond funds would be even more popular if they showed their coochie.
I was not consulted for this research piece!!!
I sympathize. You have staked out the territory. I'm sure you'll be getting an apology. So, what's the story? I'm itching to buy TBT, but I thought I might wait for a solid looking bottom. What's the real deal here?
I even never heard of someone being consulted about anything. AND I KNOW A LOT OF PEOPLE!
I would like to sell some 100 year bonds. 10 percent interest, payable at the end of term. Any takers, please contact me. Oh, by the way, if I am not around in a 100 years... joke's on you bitchezzzz!!
100 year bonds, what a joke. That's like stealing candy from babies.
it depends on the kinds of meds you take.
Not if you think with your dick or your vagina.
Let me explain: Sperm come out of the end of the dick and go into the vagina where they can get to eggs, and make babies, which creates children who can grow up and do the same. The genes built into the sperm and eggs tend to get passed on the more the creatures they instantiate are successful mating well and passing onward, and as such over eons the genes influence the brains, the instincts if you will, the very minds of the gene carriers toward the having and raising and caring deeply about the next generationS. The seller of the 100 year bond is trying to improve his or her status for mating purposes, with a long term goal "in mind", but so are the buyers, who want to believe in a perpetual income stream for their progeny. I give greater chances to the 100 year bond seller of passing his or her genes on than I do to the 100 year bond buyer, but I could be wrong. Either way, think with your dick(/vagina)!
thanks for the use of instantiate. however mhft above sees a bigger yield range on the long bond than does the treasury website (admittedly closing yields): about 3.51 to 4.85.
on a separate note, the treasury market, after the rather poor showing from the mid fifties to the mid sixties that he cites above, entered a seventeen year bear market like the equity market of the early thirties. basically bonds were in a bear market from 1940 to 1981. then they shot the moon. enjoy the green cheese cause we landed christmas '08.