Shorting the 30 year bond

[SmallCap]

Let me state up front that I have never shorted anything ever and have never been comfortable with the upside downside potential in doing so.

 

but I was thinking this morning about people buying the 30 year bond and had read recently that the average holding period of a 30 year bond was 20 days (I can't substantiate that claim) Meaning that the "holders of 30 year bonds were pure speculators using the greater fool principle.

 

I have a really hard time seeing anyone buying a 30 year gov bond who actually intends to hold it to maturity. Whenever you have that kind of a situation it is likely to end badly for the last set of holders of that security.

 

This got me to thinking about the possibility of shorting the 30 year bond.

 

Now, I should mention that I am not aware of how an investor goes about shorting something like the 30 year bond and if it is feasible to do so. I also know that I will most likely never actually invest in this idea but it is interesting to think about.

 

The reason that I don't short is that the bubble can remain inflated longer then I can stay solvent and there is unlimited downside in a standard short position.

 

Unless I am missing something there seems to be a limited potential downside to shorting the 30 year bond that includes the interest payments and the small potential increase in bond value based on interest going into ridiculously low territory.

 

The upside is fairly obvious and potentially substantial as interest rates rise, which I assume in all reasonableness they would have to within the next 15 years.

 

So my question is how would one go about shorting the 30 year bond and what are your thoughts on this type of a trade?

 

SmallCap

[Zorrofan]

Your idea of shorting the 30 year bond is interesting but rather than a pure short what about an ETF that is short the bond instead? I think you can get etf funds that are 2 or 3 times short for leverage as well as ones that are simply inverse plays on the bonds.

 

I was thinking of a safe way to short the market in general (other than a put on the SPY) where I can get a bit of leverage but not lose to much if the market correction takes longer than expected. I know for example the VXX offers a leveraged play but loses too much each month on the rollover, but I was thinking of the VXZ?

 

Any thoughts....

 

cheers

Zorro

[ragnarisapirate]

For the sake of discussion:

 

Would it be worthwhile to hedge via buying another currency, metal, or something? It is getting more apparent that the Fed is willing to be the only buyer of treasuries, which (in my mind) means that there is the chance that the prices of our government bonds could stay where they are at, with the principle just losing a ton of purchasing power.

 

 

[SmallCap]

Ragnar,

 

Your point is interesting and I considered it before but didn't go down that path because I have never heard of anything like that before and don't know what it would that, if it is possible, and what the implications are of that happening. But you have poked a hole in my theory of the interest rates returning to normal withing the next 15 years.

 

The other Hedges you mentioned are interesting plays of their own and could be successful but I am not sure they they accomplish the same thing as shorting the 30 year. those other options have both upside and downside possibilities. What I liked about shorting the 30 year is that in my mind there is limited and reasonably calculatable downside but significant upside potential.

 

I remember the guy in the book the big short. He didn't know how the unfolding of the CDOs would play out in the market, he didn't know how it would affect the banks or he could have shorted them, he didn't know how it would affect the RE market or he could have shorted that, but he did know that those CDO's were full of a bunch of junk and that eventually that junk would come to light and he found a way to short it that had limited downside and massive upside.

 

 

[StubbleJumper]

How about just mortgaging the hell out of your house using a long-term rate instead?  If nominal rates increase as a result of inflation, you'll get a similar benefit....and it's easy to do and there's no margin calls.

[bttmline]

http://etfdb.com/2010/powershares-deutsche-bank-team-up-on-3x-leveraged-bond-etfs/ Symbol: SBND

I've been looking into this new product recently. I had owned the inverse TBT before, but you are subject to tracking error with daily ETF product. This is an exchange traded note which supposedly doesn't have the same tracking error. Maybe someone here has some experience here with them that they can share.

 

I've also been looking at potentially shorting the JNK . This is the high yield index that has had a huge run up over the last year. Duration of this one is shorter at around 6-7 yrs though. 

[beerbaron]

How about just mortgaging the hell out of your house using a long-term rate instead?  If nominal rates increase as a result of inflation, you'll get a similar benefit....and it's easy to do and there's no margin calls.

 

If he lives in the US he can do it but in Canada 30Y fixed do not exist. Best you can get is 10Y and for a huge spread.

 

BeerBaron

[StubbleJumper]

The US is a better place for longterm mortgages, but even in Canada you can get 10 years for under 5%.  If you are a subscriber to the "inflation is nigh" camp, then you should be fine with that type of rate.

 

But you are right.  The US is a better place for that game.

 

 

SJ

[ericd1]

I've been thinking along these lines too...at some point rates have to go up...but then again they could go lower!

 

There are both ETFs and mutual funds with inverse term bond goals:

 

ETFs:

ProShares Short 20+ Year Treasury    TBF

ProShares UltraShort 20+ Year Trsy    TBT   2x

Direxion Daily 20 Year Plus Trsy Bear  TMV    3x

PowerShares DB 3x Short 25+ Year Trsy ETN  SBND 3x - monthly reset and ETN

 

ProsShares Rising Rates Oppty 30 yr    RRPIX (goal 1.25x daily movement)

Rydex Inverse US Gov Long Bd    RYJUX

 

There are also inverse high yield funds:

Rydex Inverse High-Yield Strategy    RYIHX

Direxion High Yield Bear Inverse    PHBRX

Direxion Dynamic High Yield Bond Inv   PDHYX

 

 

 

 

 

 

[Guest broxburnboy]

The QE2 announced the Feds intention to buy medium term bonds on the open market.. no more 20+ year purchases by the Fed. Couple that fact with the emerging inflation and shorting long treasuries is a very obvious move. I started last week and instead of holding cash I'm buying TBT. It doesn't move much daily but it seems to have broken a long term downtrend and is returning a small but agreeable couple of points every day. Many pundits have been calling this trade for a while, but obvious retail price inflation has been the missing driver. At this point I guess I'm front running said inflation and accepting it as a given.

[ragnarisapirate]

The QE2 announced the Feds intention to buy medium term bonds on the open market.. no more 20+ year purchases by the Fed. Couple that fact with the emerging inflation and shorting long treasuries is a very obvious move. I started last week and instead of holding cash I'm buying TBT. It doesn't move much daily but it seems to have broken a long term downtrend and is returning a small but agreeable couple of points every day. Many pundits have been calling this trade for a while, but obvious retail price inflation has been the missing driver. At this point I guess I'm front running said inflation and accepting it as a given.

 

What about buying Jan 2010 calls on TBT? They don't exactly look cheap, but, it seems like if you were willing to keep on buying them over a long enough period, you could do exceptionally well. By this, I mean, it seems reasonably that TBT should double in the next 5 years. Right now, the jan 2010 $75 calls are going for 75 cents. If it doubles in the next year, you would do quite well. Heck, if you keep buying the year out $75 dollar calls, over the next 5 years, you would probably end up still doing incredibly well.

 

I will say that this generally relys on the price of treasuries falling off a cliff quickly, rather than slowly. With bubbles, which, it seems that government debt is in (at least in real dollars), things generally go to hell quickly... but, there is always the possibility that it might not work.

[Guest broxburnboy]

The QE2 announced the Feds intention to buy medium term bonds on the open market.. no more 20+ year purchases by the Fed. Couple that fact with the emerging inflation and shorting long treasuries is a very obvious move. I started last week and instead of holding cash I'm buying TBT. It doesn't move much daily but it seems to have broken a long term downtrend and is returning a small but agreeable couple of points every day. Many pundits have been calling this trade for a while, but obvious retail price inflation has been the missing driver. At this point I guess I'm front running said inflation and accepting it as a given.

 

What about buying Jan 2010 calls on TBT? They don't exactly look cheap, but, it seems like if you were willing to keep on buying them over a long enough period, you could do exceptionally well. By this, I mean, it seems reasonably that TBT should double in the next 5 years. Right now, the jan 2010 $75 calls are going for 75 cents. If it doubles in the next year, you would do quite well. Heck, if you keep buying the year out $75 dollar calls, over the next 5 years, you would probably end up still doing incredibly well.

 

I will say that this generally relys on the price of treasuries falling off a cliff quickly, rather than slowly. With bubbles, which, it seems that government debt is in (at least in real dollars), things generally go to hell quickly... but, there is always the possibility that it might not work.

 

I'm not quite sure I would be comfortable with the amount of leverage implied in the financial derivatives market.. if hyperinflation does arrive and I believe that the risk of such is obviously increasing, then it will be preceded with increasing volatility (as we saw last week in precious metals) and subsequent levered swings in option values. Margin increase calls and flash crashes will probably be more frequent, playing havoc with risk assessment and participant's blood pressure ... a more important number these days to my age demographic.

I just finished rereading ShadowStat's Hyperinflation report from a year ago. The trends identified therein have continued to play out and the report, though long, still makes compelling reading for those who want to revisit the hyperinflation thesis:

 

http://www.shadowstats.com/article/hyperinflation-2010

Cheers

[Zorrofan]

broxburnboy,

 

thanks for the link. I look forward to reading it!

 

cheers

Zorro

[niels12think]

There are both ETFs and mutual funds with inverse term bond goals:

ProShares UltraShort 20+ Year Trsy    TBT   2x

Direxion Daily 20 Year Plus Trsy Bear  TMV    3x

 

Please do remember that the leveraged funds are designed to go to zero over time :o

The daily volatility works as a drag on performance.

If anything, it might be an idea to buy a put option on a geared bull fund, like e.g. TMF.

Then the fund design will work to your advantage and the downside is limited.

Otherwise, why not just short the geared bull funds or the long treasuries directly?

 

Cheers!

[netnet]

Please do remember that the leveraged funds are designed to go to zero over time Shocked

The daily volatility works as a drag on performance.

If anything, it might be an idea to buy a put option on a geared bull fund, like e.g. TMF.

Then the fund design will work to your advantage and the downside is limited.

Otherwise, why not just short the geared bull funds or the long treasuries directly?

 

precisely, short or get a put on a geared long bond ETF.

[Uccmal]

precisely, short or get a put on a geared long bond ETF.

 

Everyone has this one figured out now.  I completely missed this concept a couple of years ago when I held a leveraged short ETF on Oil.  If I had shorted the opposing ETF - the leveraged long on Oil my outcome would have been far better.