Why I?m Buying Bonds
Having flip-flopped twice so far in 2016, my bet is that the Federal Reserve flip-flops on its monetary policy, yet again.
Yes, buying bonds may appear like high treason for someone who has been trading stocks for a half century (I?m currently reading the biography of Benedict Arnold, a deeply misunderstood man).
I have made money on the well known ?Sell in May and Go Away? effect for the past ten years.
What?s different this year is that even conservative managers who usually ?poo poo? this seasonal phenomenon are coming around to my way of thinking, and getting extremely nervous.
At last week?s Wednesday afternoon massacre, the central bank suddenly flipped with its April minutes from an easing to a decided tightening mode.
You can therefore count on markets to fully discount a 25 basis point rate rise by the June 17 meeting.
And then you know what? ?Brexit,? weak economies in Europe, Japan, and China, weak corporate sales, the US presidential election, and a strong dollar will suddenly come to the fore, and they?ll sit on their hands for the umpteenth time.
Markets and traders will get caught wrong footed once again. Bond prices and the (TLT) will rocket. Yields will collapse, taking the ten-year Treasury bond yield down to 1.36%, or to new 60 year lows.
If all of this makes me sound like a reverse psychologist, you?d be right. But we have to trade the market we have, not the one we want.
The great irony is that the world will clamor to buy US Treasury bonds because, with a lofty 1.85% yield, they are one of the highest paying government debt issues on the planet.
It?s all proof that if you live long enough, you see everything.
That makes the iShares 20+ Year Treasury Bond Fund ETF (TLT) June 2016 $124-$127 in-the-money vertical bull call spread a great hedge for any other ?RISK ON? assets you may want to hold for the next month, like stocks.
I therefore expect the (TLT) to continue to trade in a sideways range up to the June Fed meeting, which will enable me to max out my profit on this position.
Bonds prices are already hinting this will happen, as the (TLT) has only given back 3.5 points since the Wednesday upset.
You would expect at least a ten point hickey if a rate rise was really going to happen, as we saw with the run up to the December 25 basis point hike.
By the way, bond traders are much smarter than stock traders, as they are backed by much more formidable research departments. Follow their lead with a laser like focus.
That is what a 30-year non-stop bull market buys you these days.
It all traces back to my thesis that this is not a deflationary decade, but a deflationary century.
Did you know that the cost of home lighting fell 1,000 fold from 1850 to 1900 when consumers switched from whale oil to electricity? I learned that little nugget reading Thomas Edison?s bio last week.
The cost of street cleaning in Boston in 1900 was astronomical, as the city then supported 700 horses per square mile, each of which produced 50 pounds of manure a day! Today that cost is effectively zero.
We are in a comparable downshifting of the structural cost of everything now, some 116 years later.
If the wheels fall off of this trade for any reason, I?ll be outta there quickly with a stop loss. Markets are volatile and tempestuous beasts these days, and can produce more manure than the lifetimes of 700 horses.
To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of optionshouse.
If you are uncertain on how to execute an options spread, please watch my training video on ?How to Execute a Bull Call Spread? by clicking here at https://www.madhedgefundtrader.com/ltt-executetradealerts/. You must me logged into your account to view the video.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don?t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
