As the title indicates, I believe now is a great time to start building a position in the ten-year Treasury ETF, ticker $TLT.
This is not a revolutionary idea--probably because I am not a financial advisor, and my thoughts on capital markets should not be misconstrued as investment advice. I am, however, a businessman. As a businessman, I have experience doing business things. It might therefore be pertinent for you all to consider my thesis, for academic purposes at the least.
The last month or two have been, hm, shall I say humorous. Gracefully, I held my tongue as the entire market flipped out about rising treasury yields. Why was I calm amid sharp equity selloffs, rocketing yields, and talk of damaging inflation?
Because a) we've heard this story too many times before, b) not mutually exclusive from a), Jerome kept on trying and trying to tell everyone that rates wouldn't rise for the foreseeable future, and c) this inflation story has not only been bandied about like folklore, but furthermore, all the while, we've failed to even reach minimum inflation targets.
Today, we finally heard from our great Teacher, JPow, who reminded the kids that the rules still apply. And what are the rules? Keep printing money and keep rates rock bottom low.
I do not for one moment buy that the unprecedented printing of money, in the face of an unprecedented halt of the entire economy, will cause problematic inflation. Also, in the end, Treasuries are not absolutely tied to the Fed's overnight rate; the demand for Treasuries is what decides the price and therefore yield of said Treasuries. We've just seen one of the biggest selloffs in Treasuries since 2018 (and the very early days of last Feb./March, until the bond ETFs regained sanity and there was a flight to safety). I don't see yields rising more, becoming totally detached from the Fed rate.
For thirty years, bonds have raged bull-wise. I don't see that ending when money is cheap as ever.
If anything, I see markets settling on cyclical, strong balance sheet equities. Even that, however, is a stretch for me. FANGMAN is about as cheap as it's been in a while. Facebook is ridiculously cheap. Amazon doubled earnings expectations recently and wasn't even rewarded for it. Semiconductors are brimming with demand. Financials are on fire. Airlines and cruises and live events and etc. etc. are preparing to come back with a vengeance. People are buying Bitcoin as if it were gold circa 1849 for Christ's sakes. We're just entering the biotech and clean energy age, even if it's still fledgling and speculative.
Moreover, we've just finished off a HUGE Treasuries selloff. It's not about where we are now, but where we were relative to recently, and with rates still near zero and the economy ready to explode, I simply don't see a reason to seek shelter; bonds will remain strong as a speculative device, as it is in all bull markets. (Bond prices don't rise because your grandma bought you a couple 20-year Bills so you could make $500 dollars when you turned 21. They rise because institutional investors are trading them.) We'd have to see a serious extension of the recent selloff to justify the velocity of Treasury yields--which have already slowed significantly since the latest growth/tech correction. Oh yeah, and the Fed is still buying Treasuries...Lots and lots of the every day all day from sunrise to sunset and maybe still in the night when no one is looking.
For a while now, institutional investors have been short $TLT (lots of put buying as well). Last August, I held the same thesis, didn't have the confidence to follow through, and shed a single tear for each day that passed as a phenomenal opportunity passed me by. Rates had nowhere to go but back up. Especially mortgage rates had gotten out of control. But this is exactly the overextension I was looking for. This is, potentially, an equally profitable opportunity on the upside.
The beauty of this trade is, you can also use this as a mechanism to hold cash for future buying opportunities, keeping it low risk. For example, say you park 10% or so in $TLT. Say it continues dropping for a bit longer. You can sell calls, collect the dividend, and keep your basis down until it turns around again. And if it stays flat, fine, either take the premiums or collect the small interest.
If you're speculating, I think calls are a decent play but not quite yet. Premiums are high as a result of the recent selloff. Personally I think shares are the way to go until IV drops as things stabilize.
I'm going to start building a position slowly as it continues dropping--about 1-2% as a nice foundation, then about .2-.5% every week or two after that. Then, when it begins to flatten out and reverse, start buying more aggressively and discontinue my short call program, until I reach about 10% of my portfolio. I'll then keep it at 10% moving forward, rebalancing when opportunities arise or more cash comes in from the 'ole 9-5. (Perhaps here I should note for the record that I am a contractor and freelance in a number of areas, ranging from business development consulting to freelance writing.
That is all.
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