Thursday, October 18, 2012

The Time to Short Treasuries Draws Closer ($IEF)

There's very little upside on Treasuries now even if, for example, the 10 year went to 0%.

I wouldn't put the trade on just yet, but next time the market has a correction and the 10y spikes, puts on this are probably a buy.

The cool thing is that there would be two ways to win: an economic recovery (it's possible!) would cause the yield to rise, but so would concerns about continued monetization.


WSM said...

But in your 'Yes! TLT' post, you seemed to completely discount the concerns around so-called 'monetization'.

Even if there is very little upside in Treasuries, what do you view as the right PROBABILITY to attach to a scenario of appreciably higher rates within, say, 5 yrs?

CP said...

I didn't say that monetization is impossible in theory, just that the amount occurring right now is pretty paltry in relation to debt.

[It "amounts to nothing" as C. Vanderbilt would have said.]

Options market already prices in a low chance of rising rates - and next market crash you'd be able to make the bet even more cheaply.

carpet cleaning denver co said...

Would you short TLT or go long TLT?

carpet cleaning denver co said...

Would you buy TLT or go short TLT?

carpet cleaning denver co said...

The short of STP is working out well thanks again.


CP said...

I wouldn't do it yet, because I think yields can go lower.

And I'm talking about the 10 year (IEF) not 30 year (TLT), but I could change my mind about that.

But, at some point, should be a fantastic short.

You'd want to sell it when it was most irrationally overpriced - which would be coincident with something like an equity market crash or an EMU breakup.

Yeah on STP! That rally was nonsense. I think it goes to zero by March but we'll see.

Stagflationary Mark said...


How about after 20 more years of equity market stagnation (in addition to the 12 years we already have)? I would not even remotely rule it out.

As a side note, if TIPS are extremely overpriced, then why don't we ever see their real yields at the top of CNBC's TV screen? Why doesn't Jim Cramer scream for us to buy them?

The last question is said somewhat tongue-in-cheek of course. ;)

CP said...

Sure, we could have decades of equity market stagnation.

We are certainly following a similar (actually worse in some ways) demographic profile as Japan.

But treasuries are cheap to bet against (and we are talking about hypothetical future where they are even cheaper momentarily), and the bet is asymmetric.

Also, by buying puts, you can get an asymmetric bet on an asymmetric bet, where the other side of the trade is very desperate.

Stagflationary Mark said...


Here's an easy one.

If you buy $5,000 in EE Savings Bonds they are currently guaranteed to double in 20 years. That's an effective 3.53% yield.

In theory, you could safely use the proceeds to short the 20-year Treasury that yields just 2.55%.

I'm not sure what the tax situation would be. I can say this. I do own EE Savings Bonds and am planning to buy more. No desire to own their 20 year Treasury equivalent.

Allan Folz said...

RE: EEbond/TBills paired trade

Great idea. Can one use stolen SSN's to scale it up? Hey, if it works for illegals pickin' peppers, and gypsies filing phony tax returns, why not Private Equity putting on a paired trade?

Stagflationary Mark said...



Most good gallows humor has at least some truth in it. I think your question certainly qualifies! Sigh.

misha said...

Sadly, Interactive Brokers pays zero on the short side of the account.

So you don't get paid much for sitting and waiting.

I was thinking of selling deep in the money calls (which results in real cash). Any other ideas on how to be able to use the proceeds effectively?