Canada | Bond Yeilds and Recession WatchLooking at the chart we can see the 3 month yield inverted with the 10 year yield a few weeks ago so recession could be anywhere from 12-18 months out. The question is, where do we stabilize in this current down swing? Things will probably go sideways for a while before we break support and rates dive to zero. The catalyst will be nGDP figures and Bank of Canada policy.
Governmentbondyields
Short TLT - Attractive OpportunityWith US rates rising significantly in the past couple of months - how should a trader play this
Being structurally short $TLT offers significant upside with a Put Butterfly Spread
We have outlined trade which can be accessed on profile however a summary is provided
2 Month Put Skew is 3.62 standard Deviations above its 1 year mean
2 Month Volatility is 1.58 standard deviations above its 1 year mean
TLT (Long US Treasury Bonds) is very vulnerable due to above trend growth, increasing budget deficits, the potential for a return of inflation and Fed Tapering
Interested in all thoughts & analysis on our idea.
SHORTING US GOVT BONDSLet me warn you now, this is not a fundamental or technical analysis based trade. This is a speculation on my behalf based on a simple theory.
As the US Federal Reserve continues to rise interest rates up to 3x this year, is it time that a true bear market in fixed income has come to fruition? Are the "safe" government bonds becoming one of the worst asset classes to be in? I would say it is up there, with the exception of tech and anything blockchain.
It takes some basic algebra to figure out if bond prices will go up or down based on interest rate increases or decreases the PRESENT VALUE (Price) of the bond. In short, interest rates rise and prices fall, interest rates decrease prices increases. For most bonds, depending on default risk, upon maturity you are paid the face value. You have security in your principle if you can afford to wait. Another interesting component is that the longer the yield to maturity of the bond, the more sensitive to rises and falls in interest rates.
So with some Bonds 101 behind us, let me give you the trade. I propose that based on the projection that if interest rates rise three times this year as forecasted by the market, long term bond prices will decline in the short term (1-2 years), so I propose that, given the sentiment in the expectation of further increases in interest rates we short #TLT, a 20+ Year Govt Bond ETF sponsored by iShares.
Some things to be wary of:
If equity markets continue to fall, say to 20% down from highs, this could cause the federal reserve to STOP increasing rates. (speculation on my behalf)
As well, if the markets do fall and firms start to go under (smaller scale 2008), don't be suprised if they start to bail firms out, look at how rich it made the government after 2008...
Dodd Frank requires banks to be able to withstand up to 10% unemployment, $383 Billion in loan losses, as well as " heightened stress in corporate loan markets and commercial real estate." A fianancial collapse is probably not out of the question, but I'm saying that if any of the above scenarios start to play out, this trade would be out the window.
So yeah, bold bet for sure, but might be something to think about. Please, tell me where you think I could be wrong.