With treaury rates well below their historical mean / median, we should expect them to revert back to normal over time, no?
I know I’m missing something here. Is it just the fact that the Fed is working hard to keep rates low, and I shouldn’t fight the Fed? Is it just that I’ll need to be prepared to wait a long time for the strategy to pay off?
Can someone help uncover my ignorance?
How long are you willing to waith eh? What if rates stay depressed for extended periods? And what’s the upside…?
It’s still not a sure bet. When US 10Y was at 2%, people said it couldn’t get any lower. Today, we are seeing 1.455%. It could be a while before rates rise again.
Keep in mind the giant debt load on govts in the western world…do you think they want rates to rise…?
Two reasons:
1 - correlation with stocks. It’s useful to have an uncorrelated asset to reduce the risk. That means you can deploy more capital for higher returns given a risk budget. Of course, if you have negative expected returns, low correlation is not a sufficient justification. Taking advantage of correlation effectively also requires some periodic rebalancing.
2 - people have been losing money on the “treasury rates have got to start rising again” for a long long time. That doesn’t mean that treasury rates can’t or won’t rise… it just means that being below the historical average is not a reason - in and of itself - to jump in and short. Remember that while you are shorting, you still have to make interest payments (albeit low ones). I think it may make some sense to curtail risk with OTM puts rather than short treasurys outright.
because it if goes down another 10 basis points and sits there for a year or more, you will lose
How would you do it? Being short is costly. Unless you think rates are going up in the very near future it would get too expensive.
We know the short end of the curve isn’t moving until late 2014 at the earliest, and the longer end is being manipulated by the Fed as well (QEx/OpTwist). Even without the Fed depressing rates, one could argue the current economic environment would lead to low rates anyway.
Rates will go up eventually. Whenever the Fed starts to unwind their balance sheet…that’s when things are going to get dicey. In the meantime, I’d fish elsewhere.
If you are a big fish, it’s easy to go long rates with swaps. For retail, it’s probably cheapest to do it with short bond ETFs. That’s if you believe it’s a good trade at least.
Yep. I thought about making a bet on this back in February using ETFs and I’m glad I didn’t. I’d be down about 10% by now.
Yeah, I was looking into short bond ETFs. I’ll have to look into puts, as bchad suggested, but I’m thinking ETFs are the way to go here.
If there’s another flight to safety (pick your catalyst), rates could be pushed down further, but I think that could be overcome if my time horizon is long enough.
I’m still thinking it all through, though. That is, what my time horizon is, when to get in/out, what my catalysts will be to trigger higher rates, etc.
if you think rates are going higher, i would suggest you look into a basket of life insurers in Canada (traded on the NYSE)…if rates rise, those things will pop anywhere near 30%…
What’s the logic behind the 30% pop in insurers on a rate rise.
It seems to me that when rates start rising, cash is really the only thing to own for a little while.
The rates on their assets will rise? Presumably, many of them are holding short duration debt anyways, so a bump in rates won’t hurt them substantially, and when they roll over to new issues they’ll do better?
The market can stay irrational longer than you can stay solvent
How many decades have Japenese bond rates been well below their historical mean?
I don’t follow the bond market as much as I should. But I think rates are low in part due to the fight to quality - the downgrade of USA actually lowered rates, if I remember correctly. For example, If Europe fixes itself calmly, I could see a lot of money leaving treasuries to go back into other areas of the world. I personally don’t know if it’s the Fed or coicidence for the low rates – generally, I’ve always read/been taught Mr. Bernake only influences short term rates and Mr. Market does the long term rates.
it’s not only US rates that are low. Look at UK, German and Japanese.
I had the same idea earlier this year and bought TBT. I got out quickly and I’m really glad I did. Kyle Bass’ best idea at the Institutional Investor conference last year was to short Japanese Government Bonds. One of the other panelists who was older said something to the tune of “I heard about that trade 19 years ago, and we’re still waiting for it to play out”.
Just thinking out loud…maybe go long high yield and short the treasury market, and that way you can earn the spread but still profit when treasury yields come up.
Short term rates use to affect long term mortgage rates. That trend broke as a world wide “savings glut” began. This increase in lendable funds brought down rates, according to Alan Greenspan in a WSJ article he wrote in response to a WSJ article written by John B. Taylor that criticized the Fed for not following the Taylor Rule prior to and through the crisis
If you do a spread trade with high yield, you are likely to get hurt when treasury rates rise, because the credit spread will very likely widen. However I do like your attempt to think up an alternate trade.