Selling short the US Treasury bond market (TLT) has been one of my core trades for the last 2 ½ years when rates hit a century low at 1.34%.
I call it my “Rich Uncle” trade. Every time bonds rallied five points, I unloaded government debt. If they rallied more, I doubled up. And my new “uncle” reliably wrote me a check every few weeks. As a result, I made money on 22 out of 23 consecutive Trade Alerts on this one asset class.
However, the gravy train may be coming to an end. Over the last week, two eminent authorities on bonds, my once Berkeley economics professor and former Federal Reserve governor Janet Yellen, and Golden Sachs (GS), one of the largest bond traders, have both opined that the yield on the ten-year US Treasury bond peaked last October at 3.25%.
My arguments against them are looking increasingly hollow, peaked, and facile. If bonds don’t resume their downtrend soon, I may have to surrender, run up the white flag, and toss my own 4.0% peak forecast in interest rates into the dustbin of history.
The data is undeniably starting to pile up in favor of Yellen and (GS). After a decade of economic expansion, inflation has absolutely failed to show. Sitting here in Silicon Valley which plans to use new technology to destroy 50 million jobs over the next 20 years, it was always obvious to me that wage gains in this recovery would be nil. Wages don’t rise in that circumstance.
So far, so good.
The China trade war continues to extract its pound of flesh from American business, trashing growth prospects everywhere. The government shutdown is also paring US growth by 0.10% a week. Hardly a day goes by now when another research house doesn’t predict a 2020 recession.
Current Fed governor Jay Powell has acknowledged as much, postponing any further interest rate hikes for the first half of this year.
If we peaked at 3.25% then where is the downside? How about zero, or better yet, negative -0.40%, the yield lows seen in Japan and Germany three years ago? That’s when my pal, hedge fund legend Paul Tudor Jones, started betting the ranch on the short side with European bonds making yet another fortune.
That’s when you’ll be able to refi your home with a 30-year conventional fixed rate loan of 2.0%. This is where home loans were available in Europe at the last lows.
After the traumatic move in yields from 3.25% down to 2.64% and (TLT) prices up from $111 to $124, you’d expect the market to give back half of its gains. That’s where we reassess. If the government shutdown is still on at that point, all bets are off.