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The short-treasuries trade, julian robertson, my advisor and "the crowd"



September 28, 2009 – Comments (18)

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?


18 Comments – Post Your Own

#1) On September 28, 2009 at 12:17 PM, kaskoosek (30.22) wrote:

Checklist I also want to do this trade.


Not sure what is the best way, I will ask my broker.

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#2) On September 28, 2009 at 12:45 PM, davejh23 (< 20) wrote:

If the Fed is the largest buyer of long-term treasuries, yields won't rise unless they want them to, correct?  If yields are manipulated, then eventually there won't be a single foreign buyer, or individual investor, willing to touch them.  At some point, the Fed will stop buying and yields will rise, or the Fed will be the only buyer, and hyperinflation will follow.

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#3) On September 28, 2009 at 2:23 PM, Tastylunch (28.66) wrote:

I agree with the Mensa member  advisor of yours (I didn't think you had one for stocks?). Far to many bears on the dollar (97% according to what I've read) and treasuries, The odds are favoring the path of maximum frustration i.e. dollar rally.

The commodity trade in summer 2008 was a lot like this. 

I'm not sure being a member of Mensa necessarily indicates invetsment skill though.:)

I will say October makes me exceedingly nervous supposedly the FED will stop QE then and if so that means the treasuries' biggest buyer will be out of the market. That *should* be very bearish for treasuries. An issue compounded by the fact that the Chinese and Japanese now completely refuse to buy any Long term US debt. But Bernanke & co aren't completely stupid so it makes me wonder what they have planned.

I'm inclined to think the Fed has another surprise for us to burn the short treasury crowd.

the other developing issue is that the Dollar is becoming a carry trade currency like the Yen and that's also depressing its strength.

I really don't think the fed can afford to let the treasury market collapse while they stil have bullets left to fire.

But trying to guess what the fed is going to do is not a very profitable game imho.

This trade is heavily manipulated by geopolitics so I'm inclined to not play it either way.

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#4) On September 28, 2009 at 5:50 PM, TigerPack1 (33.34) wrote:

The "biggest" risk to the global financial system today is a continuation of the low U.S. Dollar trend, at this stage the FED cannot ALLOW the Dollar to drift lower OR more confidence to be lost in the Treasury market bid process (since they are clearly manipulating yields by purchasing over 50% of all new issues from the government the last 12 months).

They can kill two birds with one stone by easing off the Treasury buying binge, allow yields to move 1/2 point to a full point higher, thereby increasing confidence in the free market functionality of the Treasury market, increasing capital flows from foreigners who want to buy bonds at much higher yields (and better risk-adjusted returns), and encourage central bank T-bond holders across the globe that holding Treauries will be a safe long-term bet.

If you read the tea leaves, the FED has already telegraphed to everyone the last few months, that they will allow yields to rise next year, even if it threatens short-term economic growth, to appease all the players involved AND BRING RENEWED CONFIDENCE TO THE FINANCIAL SYSTEM AND U.S. DOLLAR HOLDERS.

The options market you describe is basically "discounting" the inevitability of this situation as EVERY major player (bank/brokerage/central bank/Julian Roberts/Warren Buffett) understands what is going to happen soon, namely rising yields to support the Dollar.

The soon to be climbing Dollar value combinded with renewed confidence in the financial system will help gold and silver to dive, as a side effect and reinforcing mechanism.

-Tiger Out

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#5) On September 28, 2009 at 6:06 PM, MattH42004 (28.41) wrote:

"Financial markets are still maximum bearish on the dollar. Liquidity is being channeled out of the dollar into all other assets. This is why there is such a high correlation between the dollar and other assets. I think this is the most crowded trade in the world. When the dollar reverses, the short squeeze could cause a global crisis."  Andy Xie

 The rest is HERE

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#6) On September 28, 2009 at 10:53 PM, checklist34 (98.65) wrote:

kask:  i'd love, love, lvoe to see a elvered bull ETF with liquid options relating to treasuries...  then the clear play would be long puts and short calls. Both the proposed direction of the market and the natural decay of the ETF would be working in ones favor.

Absent such a beast... no one play looks completely promising.  The instruments Roberts mentioned aren't readily available to chumps like us i don't think.

I'll keep thinking about it.  short calls on bull treasury ETFs seems reasonable, but probably only potential for a small net amount of profit.

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#7) On September 28, 2009 at 11:02 PM, checklist34 (98.65) wrote:

dave, my advisor mentioned that the Fed is a huge buyer lately, although exactly of what and how much I can't recall.  That is not encouraging, although it is expected considering that they announced they would buy something or other.  It'd be interesting to see statistics.

It is not difficult to imagine that cash and treasuries aren't the place to be these days (long term anyway), but ... the trade is VERY crowded and a crowded trade is just never a safe place to be.  My advisor wants to be on the other side of the crowded trade short term, he doesn't debate that rates will rise long term.  Robertson thinks a cataclysmic rise of rates may occur.  Robertson may well not care if we first see another run-up in the strength of the dollar, his play may be long enough term that he simply doesn't care about teh short term, I didn't catch timeframe from the interview.

Anyway, what % of bonds is the Fed buying? 

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#8) On September 28, 2009 at 11:07 PM, checklist34 (98.65) wrote:

Tasty, I have always had the same advisor, who is in mensa, and as I always say that's got to be good.  I make my own decisions, we swap ideas. 

I don't know his long term track record for investing, but he has a very good batting average with moves like buying GNW sept calls in early july and buying puts or calls on SPY when he feels some kind of correction is due.  

I also think that somehow its likely that "the crowd" gets foiled at least once more.  "everybody" just isn't ever right.  A great deal of how this market rally has been so persistent and gotten so far is that everybody hates it and few believe in it.

I guess the question becomes at what rate do foreign gov'ts again become buyers in earnest of greenbacks?  At 4% on the 10 year?  4.5%?  Still very low rates, but ... alot higher than today.

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#9) On September 28, 2009 at 11:15 PM, checklist34 (98.65) wrote:

Tiger, do you have a source for the "more than 50%  in the last 12 months" comment?  I'm curious, I'm not being doubtful, just curious.

The options market may be efficiently discounting the inevitable, but it may also be a crowded trade.  One is ok, one is maybe risky.

The dollar carry trade situation is definitely an interesting aspect of world markets today.

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#10) On September 28, 2009 at 11:17 PM, checklist34 (98.65) wrote:

an articlementioning foreign gov't having faith in treasuries

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#11) On September 28, 2009 at 11:53 PM, checklist34 (98.65) wrote:

matth, i enjoyed the link you sent.  overall I think thats a decent thesis for a dollar bull call. 

the dollar gets strong, this results in a short squeeze people having to sell assets to buy dollars, and kaboom...  that sets the stage for my advisors call I guess.

still, long term it is difficult for me to envision that inflation does not occur through all of this, and appropriate timing and selection of play will ... will set the stage for some folks making alot of money and some losing.  Unfortunately in that case, some that will be losing will be responsible american citizens putting savings in bank CDs or bonds at low rates.


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#12) On September 29, 2009 at 10:58 AM, checklist34 (98.65) wrote:

from realmoney silver, as contributed by Tom Graff, who basically only deals with bond markets.

"Worth noting that the long bond is outperforming the rest of the curve in yield. For whatever reason, there continues to be strong foreign buying of 30-year Treasuries."

that would seem to stand in at least mild contrast to "china and japan simply refuse to buy long term US debt" and some of Robertsons comments.

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#13) On September 29, 2009 at 2:30 PM, Tastylunch (28.66) wrote:


hah well if he has a good track record that's different then. I was juts joshin you a bit my apologies :)

I also think that somehow its likely that "the crowd" gets foiled at least once more.  "everybody" just isn't ever right.

Or at least they may get the call right but not the timing (like being short homebuilders in 2005). I agree the long gold/long foreign currency/ short USD trade is getting awfully crowded. Sooner or later someone will screw up and will have to sell Gold and Buy USD which could start a mini meltup in the dollar.


I agree with you completely on this. That's a very convicing argument. That would would make perfect sense the FED would think that way.

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#14) On September 29, 2009 at 11:20 PM, TigerPack1 (33.34) wrote:

Another story about FED officials warning the markets that interest rates are on the verge of rising, regardless of the unemployment and economic growth situation.


The 50% number of FED bank buying of Treasuries is everywhere in the mainstream press, you can look at the FED's numbers that show direct Treasury holdings and totals held on behalf of foreign central banks.  This number is definitely not sustainable for long, before confidence in the system takes a dive.

The FED has introduced literally trillions of dollars in new electronic money (not paper money) and credit easing to both the banking system and the national government in Washington D.C. in the form of Treasury loans.

It is quite scary to think what the world would look like today, if the FED had not dumped money out of helicopters during this crisis.  Now they need to start taking some of the emergency money out of the system to kick-start longer-term confidence.

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#15) On September 30, 2009 at 12:44 AM, checklist34 (98.65) wrote:

if the fed holds them on behalf of foreign central banks does this in essence mean that the forign banks bought them?

your logic is good and i don't dispute it, I am just digging for the hard data here.  

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#16) On September 30, 2009 at 12:45 AM, checklist34 (98.65) wrote:

tasty,...  you make a good point about timing...

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#17) On September 30, 2009 at 11:27 AM, MattH42004 (28.41) wrote:


HERE is some info for you regarding the Fed's buying of treasuries. 

HERE is some concerning the gradual movement of foreign debt holders from long term bonds to short term bills. 

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#18) On October 03, 2009 at 11:03 AM, TigerPack1 (33.34) wrote:

Some FED data directly.

Notice the first line +$1.1 trillion increase in Treasury assets bought outright over past year!

Roughly +$400 billion increase in Treasury purchases for foreign banks.

Also, near the bottom, the FREE RESERVES number which was a record low NEGATIVE $200 billion in the banking system one year ago, is now at a record high POSITIVE +$500 billion last week.  This is one of the core numbers to look at, to gauge the liquidity in the system on which all future bank lending is based.  The banking system is overflowing with reserves, and the banks can loan basically trillions of dollars on this fractional base number at 10-20 times the total, depending on either a normal conservative 10% ratio or aggressive 5% number during the credit boom years!!!

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