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It’s Time to Revisit the TBT
Shorting the world’s most overvalued asset, the 30 year US Treasury bond, has got to be the big trade from here. The relentless whirring of the printing presses is so loud that they keep me awake at night, even though, according to Mapquest, I live 2,804.08 miles away. What will be unique with this meltdown is that it will be the first collapse in history of a bond market in a non-inflationary environment.
It is not soaring consumer prices that will execute the coup de grace to the long bond. It will be the sheer volume of issuance. The Feds have to sell nearly $2.5 trillion of debt to cover a massive budget deficit and refund maturing paper, easily the largest cash call in history. Bring in a double dip recession and a second, larger stimulus package, and those numbers ratchet up considerably.
Pile on top of that trillions more in offerings from states and municipalities that are bleeding white. By the end of 2010, total government debt from all sources will rocket to a staggering 350% of GDP. Throw in private debt requirements, like the rolling over of a trillion dollars worth of commercial real estate financing and your garden variety corporate offerings. The rush to borrow has started overseas too, with hundreds of billions of dollars more in Eurobonds floated by cash strapped sovereigns like the PIIGS. It’s clear that the bond markets of all descriptions are going to become very crowded places, driving rates irresistibly higher.
At some point, the world runs out of buyers, and the long bond yields will begin their inexorable climb from the current, ridiculously low 4.10% to 5.5%, 6%, and higher. Even Moody’s is talking about a ratings downgrade for the US debt, not that we should give that disgraced institution any credibility whatsoever. The unfortunate camel whose back is on the verge of breaking is about to have sticks come raining down upon him.
I am a worshipper of the TBT, a 200% bet that long bonds are taking the Lexington Avenue Express downtown. I managed three round trips in Q1 covering the $46-$51 range before a flight to safety bid stopped me out in April. It has clawed its way back up from $34.80 to $37.15, compared to the $70 it traded at in 2008. Falling interest rates have a silver lining in that the annual cost of carry for this leveraged ETF has dropped appreciably, from 10.5% to only 8.2%.
If short interest rates double from the current levels, a virtual certainty, so does America’s debt service, from the current 11% to 22% of the budget. This could happen as early as 2014. That’s when the sushi really hits the fan.
If I’m wrong on this and the 30 year yield surges to 3% in some sort of second Great Depression scenario, the TBT will drop down to the high $20’s. If I’m right, the final target could be as high as $200, when long rates top 13%. That’s where they were when I bought my first coop on Manhattan’s Upper East Side in 1981. If you have a serious pair of cajones on you, take a look at the 3X short ETF (TMV) with its higher cost of carry.
A 20% downside risk and a 540% upside potential sounds like a good risk/reward ratio to me. If the TBT dips again in August, it might be time to take another bite from the apple.
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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TBT is a stupid ETF to be long interest rates.
the negative carry is way to high (+4.5 % + costs a year!!)
i wrote an article on a counterintuitive bet to be long interest rates with much more interesting characteristics than TBT & PST! Corporate bond ETFs, read it hear!
http://volatilitysmirk.blogspot.com/2011/02/coming-us-sovereign-debt-cri...
Practically the only chart worth being long is TLT. Furthermore, TBT is a one-day wonder, that is, if you buy just before a spike in rates, you need to take profits immediately. Profits will erode by holding for any time after an up move.
Long term strategy, short term instrument. Has to be a better way to bet on a rise in long term rates (TYX calls/Leaps?)
You're only making money with TBT by whipping in and out of it like MHT himself (three times in Q1).
If the long end of the T market just treads water long enough TBT will go to zero. Not the best thing to own while you sit around and wait for the world to sort itself out the way you think it should.
This is the equivlant of a theological arguement. Where obviously nothing is certain.
Leveraged ETF's should not be held over a few days unless you hit a short term trend change right on the button. In which case you can let them run a couple of weeks, maybe. The one thing about the Treasury ETF's is they have a negligible effect on the market. Unlike things like the REIT ETF complex which yanks the stocks and to some extent the whole market around by the nose with the myriad arb strategies run out of the TBTF prop desks.
Anywho, when and if Treasuries come unhitched from inflation is when we officially enter interesting times. When something finally will have happened. When the anti government ideology rubber will meet the road. When they better hope that GS, C and assorted giant multinational corporations debt becomes the benchmark and we can officially say hello to the new boss. For if that fails too then it's blood in the streets, not just of the undesireables.
The Extinction of the Bond Vigilantes
http://www.financialsense.com/contributors/rob-kirby/the-extinction-of-t...
BULLSEYE. Derivative interest rate swaps chock full of treasuries mean that demand will stay up even in the midst of price inflation. The market is well and truly broken.
when the bubble in US debt pops, do you really think the "dollar" value of the FRN will be unaffected?
The bubble can't pop until BLS tells us college-educated unemployment is 20%. Pencil it out. You'll see I'm right.
You've GOT to be kidding. This is a serious analysis? Get real.
"At some point, the world runs out of buyers...."
Famous last words. They'll simply have various agencies buy the debt. Thanks to enabling acts here and abroad (our bailout bills were both enabling acts), there's no longer any obstruction to buy=borrow=lend=sell=buy.... And you are intervening in that exactly where? You're an idiot.
What is your problem? and I mean that seriously. Because you are not making ANY serious political point. And you should know that by now. So this is just sour grapes until you can show me differently.
"If short interest rates double from the current levels, a virtual certainty, so does America’s debt service, from the current 11% to 22% of the budget. This could happen as early as 2014. That’s when the sushi really hits the fan."
Gee, thanks for the warning, which has been broadcast and shouted from the rooftops for...how long now? And you seriously think that at the Fed they're not thinking about this, and coming up with some Hitlerian Mefo scheme a la Dr. Schacht, to deal with your petty objection? Your petty objection will be dealt with, and so will you. Again, how absurdly naive.
"If I’m wrong on this and the 30 year yield surges to 3% in some sort of second Great Depression scenario..."
Again, thanks for the warning. It will be arranged so that does not happen. Next?
The only thing you need to pay attention to is the college-educated unemployment rate. That's 10%. Not nearly high enough to prevent any shenanigan you can think of (or can't think of) to present a credible front to this class of worker bees. Until then, continue uselessly fulminating.
+1
every day there are less bonds (in aggregate), and every day (most days)there is more money looking for 'safety and income'... the supply and demand dynamics point to this continuing. banks and the individual investor have not even started their buying yet... that is to come.
By the way - ever look at the supply of bonds that TBT tracks...?? Out of $8.2 tril in USTs, only $800bil of them are past 2020 mty, and only $380bil past 2030...
yes, we will see 3% yields on the long bond, and for many years.
USTs = JGBs. See you in the poor house if youre going to stand in the way of that super-trend.
For once I agree with MHFT on fundamentals. Problem is, most bears have been predicting a head on crash into the debt wall since 1999, but still "they" keep pulling the rabbit out of the hat. Who thought they could keep rates this low two years ago? Almost no one, yet here we are with rates falling and strong auctions. I think I need to make an appointment with the Red Queen for counseling.
Apart from the difficulties of holding a leveraged ETF long-term (non-leveraged TBF or PST would be better buy-and-hold for this play), I agree with the basic logic of this post but I fear it is wrong. The fiat power of the central banks means that there may never be a shortage of buyers for Treasuries. The fact that it would be "the first collapse in history of a bond market in a non-inflationary environment" means that such a things has never happened. Central bank buying (directly through explicit QE or indirectly) may keep the bond market up even when price inflation finally arrives.
I too think QE II (perhaps already in place) will pump up the UST market, as will an intensifying of the debt crisis in Europe (Hungary, Iceland, Spain?). We could easily see 2.5% yields on 10-yr.
I think that will be the top of the market. Because we fund so much of our debt internationally, our lenders will not always want to buy our debt. The private holders (banks, pensions, etc.) will dump the bonds into the QE. You might even have a 'failed' auction where most of the debt is taken by the PD - who quickly dump whatever they can. That might be a start on a run on the UST market.
The trouble with the bet is that you'll want a gradual rise in rates in order to cash out your bet and move into hard assets before the USD collapse. Besides PM's, hard assets take months to acquire. So, a bet on higher rates is based upon a slow rise in rates and not a quick decline.
But, as mentioned in another comment, the only way interest rates will go up will be if the CB loses control over the market. And that would be more indicative of a quick decline.
And agree with above - the leveraged ETF's a long-term losers, much better to short the actual bond - good margin rates, low margin, etc. I think the interesting play - if you want to go there - would be to short Treasuries in a foreign account, since I think it possible that a default occurs on foreign held debt in a global trade/finance war.
MHFT seems to be overtaking Leo Kovakalis as wrong-way champion.
TBT still targeting 25, down from 65 in 2008 and 36.65 this AM:
http://stockcharts.com/charts/gallery.html?s=tbt
Fade MHT, trade with Nic.
Madhedgefundtrader,
I'm not picking a fight. Just asking how you would explain Rosenberg's arguments, that were recently posted on ZH? They appear to me to be correct and fly in the face of what you are stating. (I know, that's what makes a market). Perhaps, for some traders out there, some OPTIONS on the TBT would be better? Buying some Puts, maybe? You and Rosenberg could both be right, just in different time frames.
Thanks,
James Goulding
http://www.jamesgoulding.com/CV.html
* * * *
08/01/2010
http://www.zerohedge.com/article/ever-wondered-how-you-know-you-are-depression-david-rosenberg-explains
From Breakfast with David Rosenberg:
YOU KNOW YOU ARE IN A DEPRESSION WHEN ...
TLT puts would probably be best, as you can capture both the deterioration from the leverage trap, and the decline of the underlying bonds.
Are you aware of the structural problem with ultra funds? They are great short-term trading vehicles but horrible long-term holdings.
You could be right on the long term (and you probably are) and still lose all your money.
Take out a 30-year-fixed mortgage instead:
http://www.wcvarones.com/2010/01/how-i-learned-to-stop-worrying-and-love...
love the avatar -- the "criminal mastermind"
isn't that great? they tell you they're showing you the genius behind it and it's the Saudi version of Homer Simpson.
So, your target is $200 from the current $130ish but you're shorting bonds???