Saturday, December 7, 2021

Bonds Nears Turning Point As Retail Investors Pile In

Shorting is a game that should be played with caution, however, if done at the right time can pay off handsomely.  Generally, this is done when I see something that’s so drastically overvalued that I can’t resist.

And that’s the case with Treasuries today. Yields have dropped to levels seen right after the financial crash, and prices have skyrocketed proportionately. Comparing the TLT ETF with yields:

So why don’t I like Treasuries? Well, its really quite simple if you take a minute and think about it, for those who want the quick and dirty version, however, here’s a rapid-fire overview:

  • Treasury yields are 40% lower than ISM data suggests they should be based on historical data
  • Dividend yields on a broad range of S&P 500 companies exceed Treasury yields
  • With 10-year Treasury yields negative after accounting for inflation, experts don’t think they can go much lower

Technical Perspective

It is easy to recognize the rising wedge formation that is now at the apex, along with its negative divergences in numerous oscillators, but more noticeably the MACD. For more information on this reversal pattern, please see this article.

TLT: The ETF to Short

I only short using the TBT ETF, which is the inverse to the TLT. With that in mind, TLT is the ETF I chose to target, due to its effective duration of 17.44 and an average maturity of 27.97 years, this ETF will have the strongest price response to interest rate changes.

I believe the risk/reward profile is skewed in favor of reward. The current yield is at a record low, and nine months remain for investors to wake up and realize Treasuries just aren’t worth it.

Profit Potential

If TLT’s closing price in March ’13 is at my target price of $110 (a level seen this March), then I stand to make a substantial gain on my investments. This price level roughly corresponds to a 10-year yield of 2.3-2.4% and a 30-year yield of 3.5%.

^TNX Chart


Words of Caution

Two primary words of caution. First, the market could continue to act irrationally, and yields could stay flat (or worse, go higher).

Second, be wary of using leveraged or inverse ETFs like TBT or TYBS for too long. While these can be good short term plays, over time, they suffer decay.

I’ve been looking for an entry point into this trade, and with the recent spike in prices, I decided it was finally time to pull the trigger.

Disclaimer: I am an individual investor, not a licensed investment advisor or broker dealer. Investors are cautioned to perform their own due diligence. All information contained within this report is presented as-is and has been derived from public sources & management. Always contact a financial professional before making any major financial decisions. All investments have an inherent degree of risk. The future is uncertain, and actual results may be materially different from those expected. Past performance is no guarantee of future results. All views expressed herein are my own, and cannot be interpreted as the views of my employer(s) or any organizations I am affiliated with. Presentation of information does not necessarily constitute a recommendation to buy or sell. Never make any investment without conducting your own research and reading multiple points of view.

Disclosure: I am short TLT via TBT.

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