Shorting Long Dated Treasuries

One of my favorite investment themes is shorting the long end of the treasury curve. Something similar (just a institutional version) are playing prominent investors (ex. and current hedge fund managers) like Julian Robertson, Jim Rogers, David Einhorn and others.

In short, the reasons for playing this are: the yield an 30-year U.S. treasury bond is today at 4.27%; the yield on U.S. 30-year inflation indexed treasury is 2.08%. Translated the investors are ready to accept a 4.27% nominal yield on U.S. government debt and 2.08% real yield. For me, zero chance that yields don’t increase in let’s say next 5 years. I would say it will increase even sooner. The reasons are straight forward either: 1) the FED monetary expansion will induce inflation; 2) the U.S. will have to pay higher interest to sell new debt to finance massive budget deficits; or 3) the economy will begin to recover and the interest rates will raise. No other options.

The beauty in this trade is: that the downside is rather limited (bond characteristics, can’t go over par), the downside is disproportionally larger (statistically outcomes are skewed to the downside) and long durations guarantees large downward moves on small rate increases.

Unfortunately,  swaps as the best way to play this trade, are not available to regular retail investor; but there are two products (I am aware of only these two) a retail investor can play this trade; and both have their negatives. The options are either shorting  iShares Barclays 20+ Year Treas Bond ETF (TLT) or being long  UltraShort 20+ Year Treasury ProShares ETF (TBT). Options are available on both of these ETF’s (options come their negatives). TLT is trying to replicate price and yield performance of the Barclays Capital U.S. 20+ Year Treasury Bond Index.  TBT is trying to replicate double inverse daily performance of Lehman Brothers 20+ Year U.S. Treasury index, so it could have large tracking error.

Chart 1. iShares Barclays 20+ Year Treas Bond ETF (TLT)



Chart 2. UltraShort 20+ Year Treasury ProShares ETF (TBT)



My idea (at the moment) is buying TLT ATM March puts and extending the position by keeping the option expiration between 4-6 months.

Important factor/catalyst here is the FED ending the Treasury purchase program today. More on this in this Bloomberg story: Fed Ending Treasury Purchases That Helped Cap Yields. I believe that the possibility of extending the program (or beginning a similar program) is high, so that would extend the period of low interest rates, but that doesn’t change the longer term picture.

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This entry was posted on Thursday, October 29th, 2009 at 6:33 am and is filed under Markets. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

2 Responses to “Shorting Long Dated Treasuries”

  1. Crude Oil Day | Tainted Alpha Says:

    […] Crude Oil Day Belisarius is annoyed with unified with united horn blowing on dollar going further down and gold going further up. So annoyed it is on the brinks of placing a short gold and long dollar trade. I’ll cool down and think on that again. Such unified consensus always leads to opposite outcome. One of the reasons is (for the time being) strong Asian demand for both U.S. dollar and U.S. treasuries. Especially enlightening views from Japanese investors which shared similar near death experience during the Japan’s lost decade. Bloomberg story: Japan Tops China Buying Treasuries After Lost Decade. I completely agree on the positions for the following quarter. Longer term view here. […]

  2. Morgan Stanley vs. Goldman Sachs On Treasury Rates | Tainted Alpha Says:

    […] done. Bloomberg story: Morgan Stanley Sees 5.5% Note as U.S. Faces Deficits. As I already wrote in Shorting Long Dated Treasuries, I believe this is one of the potentially great trades, but in near term I am with the deflation […]


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