The short-treasuries trade, julian robertson, my advisor and "the crowd"
Julian Robertson's interview with CNBC in which he gave his view on inflation-vs-deflation and recommended the short-long-term-treasuries play as his favorite.
The case for the inevitability of higher interest rates seems rock solid to me. Treasuries just don't seem likely to maintain their near-historic low yields at a time when our deficits are swelling to historic record levels and quantitative easing is in effect.
The case for inflation vs deflation, eventually, also seems rock solid to me. I think Bernanke has made it clear that he considers deflation the ultimate evil and as the old saying goes "don't fight the fed".
I have personally been interested over the time in going short treasuries in some way, as I've posted here a time or 3. My preference would be to go short calls on a levered-bull treasury ETF, but I am not aware of any such ETF. Going short puts on Treasury bear ETFs would be another good play. Or going long puts/short calls to create a synthetic short on a treasury bull ETF.
I take no issue with Robertsons logic, but...
A quick look shows that this type of trade may be more than a wee bit crowded. Check out the longest-term options for IEF on yahoo finance. IEF is 7-10 year treasuries. Its $92.27 right now, the $92 put for march 2010 (slightly out of the money) is $7 while the $92 call (slightly in the money) is $1.55. That implies that the market is massively favoring the odds that IEF goes down and factoring in practically no potential upside. That is the single largest imbalance of premium on the long-vs-short side I have ever seen, and that implies that the trade is pretty one-sided now, pretty crowded, that Robertson, Myself, and everybody else is thinking the same thing.
My advisor, who is in Mensa, thinks treasuries have one more leg up from here and has made a small bullish bet (not today but at some earlier time) with options of some kind. He has a thesis for that involving A) the Fed really wants these rates to stay low and B) some chartwork and C) the fact that if China decoupled its currency from the dollar that would result in the yuan strengthening and that would be bad for business in China (see japan) and D) the possibility of a squeeze should treasury rates start dropping causing a move to the upside in treasuries (down in yields). I note that in no way is he a long term bull on treasuries, he isn't arguing that interest rates will move higher.
If the old saying that "everybody" can't be right comes into play (I've applied this to gold, so far successfully, in the past as a reason why I won't get in it) ... well "everybody" is betting against treasuries it would seem.
The long gold / short treasury trade that "everybody" seems to like just hasn't worked at all. That in and of itself is absolute NOT bearish for the trade,... if there is one lesson that I've learned from my relatively brief period on the market is that just because a trade isn't working today doesn't mean it won't work and work big at some time in the future. I bought ASH for 12 bucks and it promptly went to $5. How are those $12 ASH shares looking today? OSK lagged the rally badly into July before going on a rocket ride like few others. I then drank too much Leinenkugel in honor of Wisconsin businesses and got a big headache the next day, lol.
In looking this over today... Everybody and their moms is betting against treasuries (long gold is basically an anti-treasury bet in a way), but Treasuries keep hanging in there. Folks, are we looking at printed moneysupporting the treasury market as a means of monetizing debt?
Is there a dynamic at play here that I just don't grasp?
I cannot see how treasuries don't tank at some point in the future. But with option premium on various Treasury ETFs so dramatically skewed towards that outcome (meaning bearish bets are far higher priced than bullish bets) a fair bit of the potential profit there is already priced out.
Whats the best play here? I'd like to go short, over as long a period of time as opssible to give msyelf the best possible chance of success. Short calls on TLT? Short puts on TBT (a negative here is that youa re now fighting the decay of a levered ETF, which isn't good).
And whats the right timing? Now or never? Or do treasuries have another leg higher or at least another sideways stint with a potentially better entrance point?