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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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Bingo.
Self-reliance and responsibility rather than the
illusion of a government paternalism...
which is why that party totally ignores Ron Paul...
stop fooling yourself that they will make anything better than soothing your false fears
Does tbt not reflect the yield, rather than the face rate?
TBT 2x inverse face value, therefore reflects yield...
IF someone is telling you to play 3x leveraged ETFs... RUN. The medium-term perf is almost always dismal.
Us professionals are box-short ALL leveraged ETFs whenever we can get the trade on... it allows one to collect all the dumb retail punters money. I know some 1 or 2 guys who work this trade exclusively and expect a risk-less ~100M in PnL.
The "short 30-yr" trade is also dumb... sure, if it widens 50 bps in 1-yr you make 3-4%. If the rate goes up 100 bps to 5.66% in 1-yr you make 12-13%. But carry + roll down are killer at zero cash rates. If the rate comes down 25 bps... you lose 5% carry/roll + 4% curve = 9%. Tough trade.
Imagine if we actually had the "double dip"... and 30-yr rates went to 3.75%... just a 1x leveraged trade would lose about 20%.
Overall, its hard to make any money shorting USTs when cash rates are 0%.
Crowded trade bud, which means that it won't be the trade of 2010. I see a cyclical back-up in yields as growth surprises to the upside, similar to 94-95, but nowhere near as bad as that episode. Too many funds shorting U.S. bonds means they will feel the pain trade.
TMV target 89, up 32%, TBT target 64, up 54%.
Re 13% yields again, it takes three
generations for usury to cycle, meaning we
may see 13% or higher yields in 2041 when
some of us may be cashing Flower Bonds.
Of course, adding -6% GDP to current yields
gives a real TYX of 10.7%, enough to deflate
most economies...
I don't see long bonds and equities rallying simultaneously, at least over an ample data set, say 6 months plus. Something has to give.
I'm doomed...I agree with Leo on
something.
10yr ends the year under 3%, the 30yr under 4%. Risk-averison will reign in 2010, and the supply will be more than met.
Remember - in trading - do the opposite of logical thinking.
TBT? Are you kidding me? After watching the disaster that is SRS, you want me to believe any of these inverse ETFs are anything but money stealing machines?
Amen. I can testify to it. Made a pile in SKR/SRS then lost it and then some to SRS. Yep. Stupid. Smarter now but still, it's a painful lesson. I'm cash/gold/<5% S&P.
Wish I knew what to do now.
umm Brazil until Olympics?? hello?
Presumably the Fed will buy the long end to keep rates lower. I know this would put pressure on the dollar, but can you flesh out exactly why this won't work.
The Fed PacMan buying bonds crowds out and
gobbles up our economy. When they default,
they take all assets but dollars with them...
When the music stops possession will be 9/10ths of the law. And the law will be determined by the side that can shoot the straightest, the mostest.
considering that japan has held up for 3 decades, I would be careful about leverage any bet against the bonds
Japan is basically the Federal Reserve Asian frontman, along with Korea. There economy would look very different if it weren't for the theft through inflation.
Actually, madhedgefundtrader, you are
making an excellent case here as to
why equities must crash again. It's the
only way out for the central bankers.
What prevents the Fed from buying treasuries to keep rates low. So the dollar continues to fall and oil goes above $100. So what?
Consider bonds as a short to carry dollars...
Do you seriouusly think the FEd will allow rates to go that high? What prevents them from buying long bonds and keeping rates low? So the dollar drops? So what. Other than oil, what is the problem (and lets say oil goes to $110. So what?)
TBT (et al) is a crowded trade. I'll take
the other side and bet you Bennie and the
central bankers pull the rug out from
global equities to move sovereign
debt. After all, the entire global
recovery has been all stimulus all the
time.
Good points clandestine one. I think you are one year premature on the demise of global equities. Remember we have the all important 2010 elections coming up. All must appear to be well here in Pleasantville. Benny will continue to monetize the debt through the back door for one more year.(of course he's acting independently of politics, LOL) Next year's crash will chase money to the "safety" of Government securities. This will allow him to cool off the printing presses for awhile. Our masters and politicians can't afford to have high interest rates this year, that could threaten the status quo from which they benefit tremendously. Equity crash with low interest rates is too ugly during an election year.
yea I see Benny raising his hand at auctions regularly this year.
I disagree, but what do I know. I have a small TBT position starting at $45 but have been accumulating more recently. The bond market is too huge for the Fed to manipulate forever. The problem for them is that they have telegraphed exactly what they need to do, and what they are going to do. The other problem is that they only have a limited amount of money and they've spent all that is politically possible.
Fed can't afford another crash. This must work, which is why they've pumped up the stock market, to increase overall confidence. They've already spent trillions getting us 10% unemployment. If there's a second crash, we will be devastated so they will abandon their Jedi mind tricks and just start printing money like there's no tomorrow and everyone will start running away from US bonds.
Also it will mean politicians will dissect the Fed for their failure and there will no longer by any autonomy, so they can't afford to fail at this point. They are all in in their strategy so if the economy does start to weaken and house prices start falling, get ready for another mass infusion of money. The stock market will take off, and the long bond will drop. There might be a few weeks while investors rush to safety but after that, look out.
In addition to TBT, what are your thoughts on TMV, it's 3x leveraged short on 30 year treasuries....
In other words, "how can I make money by doing nothing what-so-ever?" Until this 'something for nothing' mentality changes, it's just more of the same. This country is in deep shit.
i agree that having a hundred different ways to trade one bond is worse than horse track... but no one sees long term investment in america anymore. if we did we all would be on some venture cap board picking through all the MIT and Stanford journals
Everyone is playing this trade. If not already, they are looking to jump in on long-dated treasury strength. My advice to you would be to google the term "leveraged decay" before you go the TMV route. VERY pronounced in 3X ETFs for a long-term position. ETFs like that are for short-term momentum trades. Yes if this trade works--and I think it will--you will come out net positive. But you will have to stomach a LOT of volatility in the process and you'd probably be more comfortable, and not a whole lot worse off, using TBT or TBF.
Agreed those 2X & 3X ETFs are not for holding more than 48 hours.
TMV looks like dead money, much like SRS. All you get is friction as it goes up and down and you end up losing all your money. TBT is better but even that hasn't made "2x" TLT over the long term if you look at percentages. Shorting TLT is the best way, I'm just not sure how to do that effectively.
Buying long-dated puts and selling long dated calls? (Synthetic position)
I use 3x for my short term trades, 48 hours max hold time. The trick is to stay away from the products that have been exposed to time decay, ie: FAS FAZ, and the rest of the older ones. Keep up with the new product releases, and use those, as time decay has not affected the new etf's yet, but eventually they will be affected.
Well put, ChickenTer. Perhaps Marla can give you the column and relegate MadHedgie to the comments section, where he belongs.
Agreed--very good points
you are better off shorting the 3X long treasury ETF if you dare go the route of 3X leveraged ETF's
I looked into this, but the triples are almost universally hard to borrow with the various clearing firms. Depending on who your broker is, on the off-chance they are able to locate, the fees you will be paying for hard-to-borrow stock will almost certainly offset savings from avoiding the leverage decay associated with longing the 3x shorts. Thoughts?
The real question is how long can monopoly money command a
0% interest rate ?????
NFL....not for long....
Today's poll says it all:
72% ZH did not buy stocks the last month...
Sure it can - as long as the FED keeps the back door open to purchase the debt itself.
Simple and it works until someone can get the MSM and Sheeple to wake up and smell the printing presses.