ISHARES 20 PLUS YR TREAS ETF TLT
December 26, 2018 - 3:42pm EST by
pcm983
2018 2019
Price: 120.00 EPS 1 1
Shares Out. (in M): 1 P/E 1 1
Market Cap (in $M): 1 P/FCF 1 1
Net Debt (in $M): 1 EBIT 1 1
TEV ($): 1 TEV/EBIT 1 1

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  • Not a value investment
  • Macro
  • Gambling
  • Speculation

Description

For brief background TLT is a long treasury ETF with duration 20+ years.

I think buying long bonds is probably one of the more assymetric investment opportunities I have seen in quite some time.

The backdrop and thesis is really simple: many cyclical stocks are trading as if a recession is imminent, despite very limited if any data suggesting this is the case. While it's impossible to know if this is the case with certainty, the market does appear to be pricing in a very high probabiltiy of a downturn in the cycle.

The two main probability nodes are:

1) Recession fears are overblown and stocks rally substantially similar to what happened in late 2015 / early 2016 - I think the only way this happens is if Powell turns a bit more dovish and eases up on the double-barrel of QT and hiking rates at a fairly rapid clip. This is exactly what happened in 2015/2016 when the fed eased up and stocks rebounded substantially. For a point of reference, from start of 2016 to middle of 2016, 10Y Tsy went from 2.3% to 1.5%, and TLT rose substantially as well.

2) Recession fears are properly founded and we are about to go into a recession - yields should fall as the cycle turns and the fed is ultimately forced to stop the contractionary monetary policy. This node is quite similar to what happened in the aftermath of the tech bubble bursting - there was a fairly long lag time between when stocks corrected and when the economy actually turned and the fed was forced to react accordingly - I think there is a high probability this ends up being the probability node we are in.

In a recent Bloomberg interview, Druckenmiller explained that one of his best trades of all time was being long bonds in the aftermath of the tech bubble; additionally, he noted that he currently is a long treasuries of various tenors on essentially a similar thesis.

https://www.bloomberg.com/news/videos/2018-12-18/druckenmiller-says-even-at-these-yields-i-like-treasuries-video

How does this idea lose money?

The main risk is if inflation actually spikes vs. what seems to be priced in now which is relatively low inflation. Even if the fed continues hiking rates, if the market judges this as a policy mistake, then the long end of the curve will still be below the short end of the curve.

Trading Dynamics:

I picked TLT as the ticker, but an argument could be made to do IEF as well which is more 7-10 year duration.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • economy enters recession
  • stocks rebound when recession fears abate
  • fed turns more dovish
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