How to Profit if the Bond Bubble Bursts

With 90 day US Treasury Bills providing negative rates and 30 year rates hovering close to 3%, we have to wonder how much lower rates can go.

I thought that rates couldn’t go below zero but you realize that if you live long enough, you may just see everything as was witnessed with shorter term rates doing just that.

Long-term rates may go lower but one would have to think that with all of the economic stimulus provided, inflation will resurface sometime down the road and interest rates will have to go up in order to combat higher prices.

Another indicator that we may be nearing the end of this bond rally is that positive sentiment towards bonds is close to an all time high as 89% of all portfolio managers are bullish in this area.

Fixed Income Investing 101 will teach us that as interest rates rise, prices come down. If you believe rates will start to climb, here is how you can profit. The most sensitive price movements will be in longer term bonds such as the 30 year treasury bond. Aside from selling your position in these securities, one can profit by buying  an exchange traded fund on The TSX that goes up in value as the price of the 30 year treasuries drop.

Horizon Beta Pro has launched a 30 year Treasury Bear ETF that trades under the symbol “HTD”. The ETF will give you 2 times the daily movement up or down of the 30 year treasury bond allowing you to profit significantly from an upward revision in interest rates.

Please note that holding this ETF over a longer period of time will show discrepancies in the 2 times return expectation and will come in closer to 1.7 times due to a variety of factors that I dont want to explain in this post.

What are your thoughts on this idea and where do you think interest rates will head in a years time? Your thoughts and comments are greatly appreciated.

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3 Responses

  1. Just bought UCO today – Proshares equivalent short 2x instrument for the long part of the US Treasuries curve. (I bought the US version for the better liquidity.)

    The success of this trade depends on how bad the economy and markets get. More short-term market downside or geopolitical instability, and the trade is going nowhere.

    I’m using it in my allocation strategy, and have installed it as being generally in the right “ballpark” for the long term.

    Cheers,
    George Parkanyi

  2. Sorry, correction, I meant TBT for the short bonds. UCO is the 2x crude oil ETF (I did buy that as well).

    Cheers,
    George

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