Sunday, January 26, 2014

Incredible: Shorting the 10 Year Bond to Hedge Stocks!

Bronte:

"Tepper outlines his short case for bonds. He is not short them because he thinks that there will be inflation (in fact he doesn't think there will be). Rather he is short them as a hedge against the consequence of the Federal Reserve trying to exit QE policies."
Wow. So the conventional wisdom is that Federal Reserve buying is maintaining the price of the 10 year treasury and helping out stock prices. Of course, we know that it actually scares holders of fixed rate debt  (inflation and dollar devaluation fear) and causes yields to be higher than they would otherwise be. 

Remember that the ten year has become a very crowded short over the past year. So this same backwards thinking is apparently totally consensus.

[I'm also astonished that someone could have had their "worst day in history" on Friday. A 2% market decline!]

9 comments:

Stagflationary Mark said...

Wow. So the conventional wisdom is that Federal Reserve buying is maintaining the price of the 10 year treasury and helping out stock prices.

Yeah, isn't it something?

Of course, we know that it actually scares holders of fixed rate debt (inflation and dollar devaluation fear) and causes yields to be higher than they would otherwise be.

We do think we know this. And when I say we, I mean you, me, and a handful of others.

What's the worst thing that could possibly happen though?

Echoes of 2007

I'm trying to remember what happen to interest rates the last time THAT happened. If memory serves, and forgive me if I am wrong on this, we got ZIRP.

So what do we get if THAT happens when we're already in ZIRP?

ZIRP II: A Continuation of the Killer ZIRP

Sounds like an economic horror movie to me, not many seem to notice.

Shorting bonds as a hedge against falling stock prices? Does the insantiy ever stop? Seriously.

Stagflationary Mark said...

As a side note, I posted the following at Calculated Risk in the comments.

Employment Hump Déjà Vu (Musical Tribute)

One of the resident optimists said, and I quote, "With a sample size of one, I can see that you aren't serious about debating anything. Regrets."

It's 10 years of data showing the annual change in the annual average of the aggregate weekly hours worked by production and nonsupervisory private service-providing employees.

You'd think that a chart of service employee hours worked would be important information regarding the health of our service economy.

Nope. The chart didn't match his conventional wisdom that the economy is doing well so it was of no "interest" to him. Pun intended.

CP said...

Mark, I thought this comment of yours was very astute:

"I can say this though. If I am financially ruined in TIPS and I-Bonds, then I'll be taking stock market investors with me (there's no way they would not share in my pain). The same is not true in reverse. Another stock market bust won't affect me any more than the recent boom has more than likely."

CP said...

I also like this post of yours:

http://illusionofprosperity.blogspot.com/2013/10/total-fertility-rate.html?

Our demographics are were the Japanese' were in 1995.

20 years later, the yield on their ten year JGB is ~ 50 basis points.

When their central bank prints money, it seems to result in euphoric rallies and staggering crashes - yet - it doesn't alter much the slow grind of their yield curve lower.

And yet people still say that JGB yields can only go up! The widowmaker trade for a decade!

CP said...

Two vast and trunkless legs of stone:

http://www.youtube.com/watch?v=FCGuA0ynGGs&feature=youtu.be

Ozymandias (Percy Bysshe Shelley) - Ben Kingsley

CP said...

Nothing beside remains.

Stagflationary Mark said...

Mark, I thought this comment of yours was very astute:

I told my tax preparer that once and she said it must give me little comfort. I agreed. Sigh.

It's a "don't be the first to lose it all" strategy and one that I have used with success in the past.

The Game of Risk

My strategy was simple. There was no grand scheme for total world domination. I simply did not wish to lose first and I meant it. That's all I was striving to do and those I played with believed me, mainly because it was absolutely true.

Stagflationary Mark said...

CP,

The Sarcasm Report v.183

January 22, 2014
Forbes: Protect Yourself From A Treasury Bond Crash

How do you make money from this crash—or at least lessen your losses from it?


Hahaha!

Anonymous said...

Feeling very bullish on the 10 year.