 |
Last week most of the financial media focused on the fact that the stock market made new highs for the year and hit the highest level since 2006. Indeed impressive. But I don’t believe that was the week’s most significant event …
I believe that the 10- and 30-year Treasury yields breaking out to the upside for the first time in months deserved a lot more attention.
The breakout was in reaction to the Fed announcement that basically said, given the recent economic strength, there was little chance for additional quantitative easing, while at the same time despite rising oil prices, they don’t see inflation as a risk at this point, signaling there is little chance of tightening of economic policy.
This change in stance is a significant one. It lead one Wall Street investment bank to declare the 30-year bond bull market over. And if there is a shift pushing bond yields higher, it has tremendous implications for many investments.
And as I’ve been telling my Million Dollar Contrarian Portfolio members, there are some incredible opportunities in Treasury yields once they start to rise.
Here are three of them …
First, and the easiest for professional investors, is to simply short the 10- or 30-year Treasury bond through the futures markets. This, however, requires that you’re comfortable trading futures and have a futures account, something most individual investors don’t have.
The second way is with ETFs. Luckily, there are ETFs that provide generally the same exposure as futures, although there are some things to be aware of with inverse ETFs.
A lot of people try to short yields via TBT, which is the ProShares UltraShort 20+ Year Treasury. This is a leveraged ETF and is meant to rise 2 percent for each 1 percent drop in long-term Treasuries.
Just keep in mind that as with all leveraged ETFs, TBT is going to have a decent amount of slippage over the long term versus the underlying asset (in this case Treasury bonds).
[Editor’s note: To learn more about slippage, our ETF expert Ron Rowland explains it for you here.]
That’s why, generally speaking, I don’t think leveraged ETFs are good long-term investments. But at the same time if yields move much higher from here, TBT could pay off handsomely.
An option you could consider that will suffer a bit less from slippage and might be a better longer term holding is ProShares Short 20+ Year Treasury (TBF) — the non-leveraged version of TBT.
Finally a third way you can get “long” Treasury yields is by taking on all the debt you think you’ll need for the next couple of years.
Locking in rates now, at historic lows, is a way to effectively get long yields — because all your assets should begin earning more as yields rise. Meanwhile you’ll continue paying lower interest rates on the money you’ve borrowed.
The era of lower rates looks like it’s coming to an end …
It’s not ending tomorrow or next week or next month. But there is no doubt whatsoever in my mind that the tide has changed. And if you take advantage of this shift in rates and seize the opportunity, you’re bound to reap substantial rewards.
Best wishes,
Tom
Tom Essaye oversees Weiss Group’s Million-Dollar Contrarian Portfolio, in which company founder Martin D. Weiss has staked $1 million of his own money.
Tom began his financial-services career at Merrill Lynch, where he worked on trading desks on the floor of the New York Stock Exchange. While on the floor, he managed multi-million dollar equity trades from some of the biggest hedge- and mutual-fund firms.
{ 1 comment }
While I agree with the premise, my thoughts are that is too early for the ideas presented. Yes, this recent move in yields has been great for traders who correctly saw it coming and shorted Treasuries. However, I argue that to view the recent upswing in rates as a new paradigm set in stone is premature. We have had other similar yield action – a series of head fakes, if you will – in the past 4 years; and they have all been an opportunity to take a LONG position for the next rapid move down in US Treasury yields – a great tactical trade every time! I would argue this is another such opportunity, quite contrary to your commentary’s premise. The “global crisis” is not over, we argue. EU sovereign debt problems in particular still loom large; and then there is China slowdown, oil pricing, and the reality – as we see it – that the supposed “economic recovery†is about to stall yet again. In summation, the global debt crisis has NOT been resolved. From our perspective, this can only signify the current yield rise is yet another opportunity to BUY – even leverage – US 10-year Treasuries in the 2.35-2.50% range and watch our profits grow yet again as rates fall AGAIN to the 1.50-1.80% range (our lower!).
On the note of leverage, I have always found success in using the US Treasury Strips, which basically produce the same sort of effect, without the slippage you mention.
Just some thoughts – this is what makes a market: you sell, I buy.