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Why the Big Trade of 2010 Will Be a 30 Year Treasury Short
Shorting the world’s most overvalued asset has got to be the big trade for 2010. I’m talking about 30 year US Treasury bonds.
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 on 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.
Pile on top of that billions more in offerings from states and municipalities bleeding white. By end 2010 total government debt 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 $75 billion in Eurobonds floated by sovereigns and corporations in the first two weeks of the year alone. 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 4.6% 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% leveraged bet that long bonds are taking the Lexington Avenue Express downtown. It has clawed its way back up from $43 to $51, and $60 looks like a chip shot for the first half. Longer term, this ETF could hit $200, when long rates top 13%, as they did when I bought my first coop on Manhattan’s Upper East Side in 1981. However, it may take several years for us to get there.
If 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. That’s when the sushi really hits the fan. Don’t expect the dollar to hold up very well either when the tsunami of red ink hits. And while you’re at it, short some JGB’s. Japan is much farther down the debt road than the US, with far bleaker economic prospects.
For more iconoclastic, out of consensus analysis, visit www.madhedgefundtrader.com, where conventional wisdom is drawn and quartered daily.
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Why is everyone talking about TBT,
when you can just short the futures?
btw, Yen is not a reserve currency. If dollar could be just a ordinary currency as yen then it probably being already collapsed. But people around the world still holds and trades enormous amounts of USD, and this is why they could print and print and print. USD will have less values but will remain in circulation around the world. This is called mere inflation, if I understand things correctly.
Here is a scary link:
http://usdebtclock.org/
OUCH!
Hello,
I have noticed that in the commitments of traders reports, commercial traders have been increasing their long positions steadily over the last few weeks. It looks like the 30 year has broken out of a consolidation base yesterday, and is now finding support at prior resistance.
Can anyone please explain why the TLT seems to be vastly underperforming the ZB over the last few days?
Disclosure: long TLT
Thanks
Gold....is a crowded trade....
Short the LT govts. is a crowded trade....
This is a TRADERS market....
Buy and Hold is no longer valid....
Best way to short Soverign Bonds (10 Year) is to go long physical gold (and pay with dollars).
This is not rocket science and leave FAR LESS exposure.
Shorting Bonds against a printing press is suicide.
Shorting Bonds Via hold Physical Gold is a dream come true (they MAKE IT HAPPEN FOR YOU).
You guys will never learn.
Yes, and better yet, leave the financial casino entirely. No use of margin, no borrowing, just dont feed the fiat fractional reserve monster ... its their game, they make and change the rules at will and can often make their predictions happen.
But we get addicted to the game, especially those of who can make money regularly, but the partial-reinforcement effect keeps many of us playing who are losing. Its exciting, to be sure, but do you want to spend your days and years at this? Good luck if you do, but consider that time and energy focused elsewhere might be more productive, starting s successful business, learning another skill or profession, using these analytical skills to produce something. This monster is eating me and mine, so adios Casino.
i agree. (see far above) lost on srs.
cre should fail but anytime you bet against
the scum who can manipulate the market, you
lose. suspension of mark to market. printing.
QE 1, tarp, talf, ppip whatever.
now they want to start stealing retirement
funds as well? I think everyone should pull
cash from banks, start purely off grid economies,
pay/trade/barter and get .gov off our backs.
they can manipulate only their market. time to
go off grid.
My thoughts, exactly.
For a crowded trade it seems like a lot you dolts are against it..the 30 year has nowhere to go but down..us bonds are in the largest bubble in the history of bubbles and if you fail to realize this you're not too bright
We're not very bright, but you are?
Nuthin to it, right? It's an obvious
winning trade, right? And if it blows
up in your direction, you fully expect to
get paid, right? Who's the dolt?
Short long dated treasuries for real in an interactive brokers account. no?
The thread I thought was about the 30 year Treasury, not leverage erosion.
Two points the article writer isn't deep enough to grasp.
1) There are no alternatives. No, not enough gold comes out of the ground to absorb all the world's money looking for a safe home. Come on, THINK. The world is in a panic. It is terrified. ZH KNOWS this. Terrified money doesn't go to stocks. Terrified money doesn't go to sugar. Not enough gold exists to consume all the terrified money. So that money doesn't go anywhere but where it thinks there has "always been" safety. There is not enough paper from any other country to absorb all that money. Sovereign debt from where? would you choose for terrified money vs US government paper? England? Dubai? See? There's nowhere else to park. That's why Treasuries won't collapse. The worse the economy, the less chance they fall.
2) It's somewhat obvious that everyone and his brother is looking for a Treasury paper decline and rate increase. We know what it means when everyone looks for something.
Well said.
+++
You have to proposal an alternative. Stocks, yes. But then we recover. Consumption, yes! But then we recover. Your mattress... idiot! the only thing worse than 10 bps is 0 bps.
Exactly Bruce, I couldn't agree more. The negative carry on TBT and the other leveraged decaying wasteland ETF's is ridiculous. see my response below to MHFT, he doesn't get a clue (i've even mailed him personally to request that he qualify his posts for amateurs to mention the fact that leveraged ETF's should not be in your "buy & hold portfolio"...they are designed for very short term TRADING only!!!
MHFT, I'll say it again as I did on your post yesterday. Granted long bonds are a bubble...but I really wish you would quit pumping the TBT. The levered garbage is exactly that --> garbage. With the long bond between 4.60% & 4.70%, TBT ought to be in the $57.50 area like it was in early June 09' when rates were in the same ballpark. But it's not, it's below $50 because it's a decaying piece of crap that should only be traded on a very short term basis.
For those of you interested in avoiding the decay factor but still picking up the exposure to being short the long end of the curve, have a look at the 1x instrument which tracks the exact same index: TBF If you prefer to be long the long end, get on board TLT.
This must happen with all of the nuked ETFs. The roided up spiders SSO and SDS are great for swing trades but horrible for long term stuff. They both track very poorly when compared to the SPY. IMO anything long term should be only 1x.
I have accumulated a sizeable US Treasury Bond portfolio gradually over the past year as the prices have dropped.
I am hedged mainly with physical gold and silver and also partially with TBT.
All the disparaging comments above regarding the TBT "time decay" are correct. It is however possible to offset this somewhat by writing "way-out-of-the-money" calls against the position. This has worked fairly well for me so far.
QevolveQ,
Your warnings are bang on. These leveraged ETFs are the biggest scam ever, and only to be traded short-term by pros. Unfortunately, the retail crowd keeps buying & holding this garbage, losing their shirt in the process (SRS is a perfect example, although on the long side, I like USD).
had the huge misfortune to
not understand decay.
had srs, lost close to 50K on it.
yeh, stupid. that's life. but
learned from it.
don't see buying etfs again except
for less than a 12 hr hold. it's
a losers trade.
i see i'm not alone, though - wonder
how many others lost on it too.
right on, thanks Leo...i enjoy your work on here, great reads.
I like the TBT as a trading opportunity from time to time. But I don't think it is a buy and hold. What is the negative carry of this trade. 8%? Maybe higher? On any give day the carry is a non factor. But over two years 16% cost to won is too high for me.
Of course if rates go to 13% the TBT would be a home run and I would be wrong. I can't see how rates could get that high. If the long bond gets to 8% our economy will collapse. We will blow up well before 13% is ever seen. I don't think any industrial economy can survive for long when goverment bond rates pass 10%
Just read the "Converting 401k and IRA Funds Into "Steady Payment Streams" article. If Obama can force the above would that not kill any bet on the short side of the US bond market?
Just a note: I closed my 401k and my IRA within days of Zero being elected. I know a thief when I see one.
This is a very interesting question that is harder than just a first derivative view of supply/demand. One important thing I've noticed is that the world has moved away from long term assets in favor of short term assets. Investors are now traders. Long term assets have been moved from the US to China.
Corporations are generating cash and hoarding short term assets while keeping their long term funding in place - a negative spread proposition. With few investment options, when do they start repaying long term debt?
Mortgage demand continues to fall despite the government's best efforts to stimulate housing.
With short rates around 0%, what incentive does the government have to borrow at the long end, apart from the obvious danger of relying on short term funding? Besides, nobody wants to own long dated paper, so it appears we've achieved a clearing level on the short end of the curve.
For long rates to rise aggressively from here, there would have to be rising demand for long term assets. Corporations, imo, will buy back their own debt in the near future to reverse the negative spreads. Housing demand will continue to fall, which will reduce demand at the long end.
There is a real threat to the TBT crowd in the form of the Fed's efforts to borrow at the short end to buy long term assets since nobody else will. If this happens, the Fed assumes all the spread risk but with declining demand for long term funding, they could theoretically produce a much flatter yield curve.
The part I haven't worked out yet is the impact on government revenues. Without long term investing, taxable revenues decline along with employment - we get deflation. Now, I don't expect deflation to prevail for long but its hard to argue against the trend. Ultimately, I think the TBT crowd wins but that's because I expect the government to be forced to revalue in one shot - literally printing a boat load of money to deposit in their accounts to meet obligations.
If/when that happens, long term rates spike higher but if I'm right, that should also coincide with a return of long term investing because without higher rates, there is no barrier to entry in most industries that require capital. This makes government revenues my most important indicator at present - they'll tell us when the government is desperate enough to turn on the printing machine full blast. But until that time, TBT is a tough bet to make.
I don't have a finance background and I thank all of you at ZH for the education. Here are my thoughts that I would like any reponse to. (also, I'm a new responder)
Since the SEC is starting to go after the 3T+ in money markets and the Treasury is starting to go after the retirement accounts, it seems to me that later this year and early next years pruchase of Treasuries will be covered by American Savings. I believe that this year the US has to sell roughly 3T to keep up. Therefore, the short 30's may not be profitablt until next year or beyond when the gov has no other options (other than planned market crash). At this point, I too expect a formal devaluation of the dollar (similar to FDR's action) but instead of devaluing aganist gold, I think the a formal devalue against a new updated version of SDR's. With the incredible amount of debt coming as well as what will be created, is there any other real option? (other than default).
Excellent analysis, B G R.
Thanks CTB. I left out my thoughts on corporate working capital - falling inventories but rising accounts receivable. The thing that's frying my brain is the question of how can money market funds deploy funds in a way that returns principle when corporate working capital is falling? When banks have no marginal use for these funds outside of gunning index futures? For me, credit risk is far and away more significant than duration risk.
"For me, credit risk is far and away more significant than duration risk."
+100!!!
Last January, I wrote a comment asking whether there truly is a bubble in bonds. Since then, unprecedented stimulus has altered some of the dynamics in the near term, but longer term, we still have not escaped the real possibility of debt deflation. In such an environment, even at historically low rates, good old bonds will outperform all other asset classes. That's exactly what happened during Japan's lost decade.
The point is that bonds can get whacked in 2010, but longer term, their performance might surprise all of us. That will be the "wow' trade of the decade!
You could have a deflation, and still have bond rates rise if bond investors believe that the risk of default by the issuer (sovereign or not) is rising.
If other countries start defaulting, the US might initially be a beneficiary, and see rates drop, but if the hard work of putting our fiscal house in order is not underway, the bounce may be temporary, and we may simply be next in line.
The US Govt cannot "default" on USTs. This is non-sensical. It is largely supported by misinformation about the state of overall indebtedness (30-50% of the "national debt" in INTERNAL... i.e. inter-account transfers) or the possible outcome set.
"Rates" cannot go up without recovery... bc there is a curve, and it rolls down to the short end. This means 3-yr at 5%... rolling down to 2% 2-yr... would be 11% return. If you had no recovery... everyone would take 11% in flat curve 3yr trades (people would lever it up).... which would push the 3yr rate down to... ah, 1.5%... right where it is today.
In order to push rates higher... people have to want to move their money somewhere else... like stocks, or businesses, or consumption.
There are ONLY TWO THINGs you can do with $1 -- spend it, or lend it.
Did rates go up in Zimbabwe or Argentina because of an economic recovery? No. They did because global investors started losing confidence in the fiscal policies and position of the country.
I think that there a number of countries that will experience default before the US if things go that way (i.e. global depression vs. recovery). Despite all of the abuse, there is still a lot of strength left in the old Bessie. But I thing that we are whistling past the graveyard I we think that we won't ultimately suffer a similar fate if we don't wise up and stop spending what we don't have.
Broken record time: the key to everything effecting our current existence is the continued ability of the Fed to monetize the debt. The technique and/or method is immaterial, whether stealth (freshly printed 'cash'->MBS->Treasuries) or overt (QE 1.0). What matters is market interest rates.
If we as a nation are forced to pay market interest rates on both public & private debt, three things will happen: (a) the debt deflation tsunami that was (temporarily) held back during 2009 will finally be unleashed; (b) US GDP will contract by 25%+; and (c) all levels of government, ranging from the outlaw federals, to the sovereign states, including munis, counties, districts, etc. will either default and/or declare bankruptcy.
The USA will essentially cease to function as a cohesive whole. With all major social spending programs, except defense, severely curtailed, it will exist only as a legal framework with no real power to enforce any dictates.
The looming end of the nation is the reason & rationale for the endless parade of illegal activity taking place across the board. It puts the word national in "national security", meaning security for those benefiting from the national beast, not the people who it's actually supposed to serve.
Watch for the end of QE from whatever angle it portends; it is the ultimate "tell".
Smart dog.
Tell is here: check M1,2 & 3 and reserve rates.
Very unusual to see money supply slowing and
rates increasing = default risk.
Then not one in a million understands deflation.
http://www.jubileeprosperity.com/
Interesting take. Thanks for sharing.
Why so many anonymous posts on this thread? They all seem to offer the same viewpoint. I would be interested to see how many different IPs are actually generating these comments.
That said, I agree with the anonymous poster who is skeptical of the short treasury trade in the short-term, although the day will certainly come when the trade is justified by fundamentals. I hope to jump in before that day. Right now the trade is working because, like Leo says, it is crowded and probably a little ahead of itself--many hedge funds are joining Pellegrini et al into this strategy. john_connor is right--I don't think we can see a sustained rally in treasuries and equities. The time will come for this trade. To everyone who plays it short-term, I hope it works out for you. I want every zerohedgie to make money
i'd rather post anon because its
to shameful to admit a massive loss
even if it was in a rigged game
TBT is a poor choice to express this trade but may be the only way for retail to do it. The volatility component of the 2x leverage could have long rates at 15% where the etf really doesn't do much. TBT gives you 2x the daily rate of the underlying. So unless long rates move one way everyday for a long period of time, the divergence in performance between the etf and underlying will continue to increase. If you look at any historical chart, this is rarely the case. I know a lot of hedge funds that use the levered etfs but truly misunderstand how they work. Great for intraday hedging and trading but the longer you hold them the greater potential for disappointment. Best way to do it would be short TLT if you can get it and make it a double size normal position in your portfolio.
I don't subscribe to the 30 yr short trade,
Last year was "supposed" to be the death knell for commercial real estate. While it did suffer to some extent, betting on SRS (generally) would have lost you big money.
Between Glasnost Knight and the Pimps, investing in the market is for the "feudal, the prowl, and the brazen."
I know. I lost on SRS. Never again.
This guy has been banging on about the 2x leveraged ETF TBT for months and never once has tried to explain to people the fact that the return is daily based upon 2 times the daily change in long bond prices.
Obviously, there are many highly sophisticated investors out there, but this is not a buy and hold product suitable for 401k or other longer term investment strategy,as you can piss away the return through the volatility, unless you rebalance the notional daily. In fact, given the daily rebalancing, it makes more sense to open a CFD trading account and short bonds that way.
I read the last auction was 250% oversubscribed. The dollar has been fiat for years, and really in the end the only things that matter are whether people will continue to accept it as good for 'all debts, public and private', how it is seen vis-a-vis other currencies, and the status of the political and military hegemony of the US to back all that up.
Adding all that up, I don't think a big short bet on US govt debt will pay off.
Wow. Your original thought completely astounds me.
Oh wait...
I lied.
Seriously, does zero hedge ever push any agenda besides the short treasury?
Deflation arguments are weighed in contrast against inflation and then higher yields are pushed.
Seriously, has anyone else noticed an agenda?
true - and they want GS more dead than Fuld does..
interesting that with all the insane intelligence from Tyler, it appears his needle is stuck n that part of the record.
I'm not sure there is any means to an end here.. like getting too close to a black hole and then having to hope it dies out before it kills you all the while you denounce its physics while it laughs at you
Won't pension funds, some hedge funds and some bond funds jump in like mad when rates reach 7-9 percent, keeping a ceiling on things (to some degree)?
The FED will target the rate they want and do whatever QE is necessary to meet their target. If rates go up, it will be because of a FED decision. Not a free market decision. I wouldn't place a wager entirely based on what the FED decides.
buying the UST here is like picking up nickels in front of a steam roller - wearing a long and uugly necktie.
most of the TBT players will lose all their money (save for the fund itself) - because the timing will not cooperate.
also, barney frank & co will make life more difficult for people engaging in trades like this one -
also also, if the TLT blows up - REALLY BLOWS UP - and you've got a 1000% gain on your TBT - who do you think you're going to collect from? There won't be any cash to send you.
Actually, the SKF skirted the short sale ban in 2008 since they use swaps and do not outright short financials. So I doubt that the inverse bond ETF's will be banned either, since Profunds is not shorting bonds.
does tbt not reflect the yield, as opposed to the long bond face rate?
Flight to Safety kills your argument. Insolvency issues are still not resolved. Banks may be healthy but that is about it. The Banks can't save the rest of us. The economy is tending towards depression and the death-knell is the fact that the NEW Republican political environment will not support another round of huge stimulus in 2010.
REPUBLICANS = NO STIMULUS= DEPRESSION= FLIGHT TO SAFETY
REPUBLICANS = STRONG DOLLAR THR0UGH MILITARY= WEAK COMMODITY PRICES = FLIGHT TO SAFETY