When I took my 25% position in TLT, back in late December, I said I’d hold it until the yield curve inverted. The last time the yield curve inverted was back in 2007, right before the world almost ended. For those young to the world of investing, the yield curve is the spread between the 2 and 10 year duration treasuries. When the yields of the 2s surpass the 10s, doom is right around the bend.
The inversion of the yield curve has accurately predicted every recession over the past 50 years. Therefore, and it goes without saying, it’s notable when the curve begins to flatten.
As of now, the spread is at its narrowest since 2007, just 93bps.
When the Fed hikes rates, I predict the long duration yields will fall, and the shorter term will rise. This trend will continue until people finally figure out the Fed has purposely wrecked the economy, at which point we will already be in a recession. The yield curve will be inverted and “The Fly” will win again, via his large TLT position.
This is prophecy at its highest and finest form. Failure to acknowledge future facts is no different from being in possession of a time machine and not winning the lottery at some point in your travels.
If you enjoy the content at iBankCoin, please follow us on Twitter
Admittedly a bit late 2 the party but just added a flattener to my futures trading acct Sunday afternoon.
Don’t need a time machine to see the immediate reaction to rate hikes: all rates rise, bonds sell off, including TLT. May 18 was a great test case.
After that fiasco, no way will I hold TLT while the FED is ruminating. However, I **will** fade the sell off and buy TLT calls right *after* a rate hike is announced.
BTN
You literally have no idea what you’re talking about. But that’s cool, I guess. Ignorance is bliss…man.
Rock on!
May 17 1600EST
TLT $131.26
May 18
0116EST Theory formed,
http://ibankcoin.com/flyblog/2016/05/17/cramer-bulls-are-gonna-have-to-pray-to-yellen-multiple-rate-hike-loom/#comment-489904
0930EST, TLT $130.78 < -0.48 foreshadowing
1000EST, TLT $129.97 < -1.29 positioning
1100EST, TLT $129.95
1200EST, TLT $129.85
1300EST, TLT $129.84
1400EST, TLT $129.97
1420EST, TLT $129.94
1430EST, TLT $129.94
1440EST, TLT $129.33 < -1.93 panicking
1450EST, TLT $129.18
1450EST, TLT $129.24
1500EST, TLT $128.95 Excellent, Dude!
I will admit, at first I didn’t know *why* a potential FED rate hike was causing such a selloff in *long-term* bonds, but quickly decided it was the work of morons and auto-traders
Learning from experience and Reloading
http://ibankcoin.com/raul3/2016/05/18/fomc-minutes-spike-likelihood-of-june-rate-hike-up-over-30/?replytocom=32428#respond
Note that the FED minutes from the April meeting were released at 2pm on May18 indicating:
“Most participants judged that…it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.”
which indicated much higher odds of a June rise than the market had predicted.
BTN – your whole thesis is very mistaken. It’s the front-end and belly that’s immediatly impacted by rate hikes. Yes, 5yrs and lower will all likely sell off.
BUT, the demand 4 Treasuries now ebbs and flows with (1) the downside pressure equities are feeling (2) commodity weakness causing commodity producing sovereign wealth firms to croud into Trsy’s (3) relative yield to other international govt. paper like Bunds.
If a rate hike happens, equities will fall, commodities will fall, and all 3 inputs will be in effect producing a strong bid to back end rates relative to front end i.e. FLATTENING
probucks, my whole thesis has already been confirmed. Your disagreement is with the market, not with me.
– Before the April meeting, TLT plunged
– FED minutes were released May 18, TLT plunged
Now if you want to argue that it *shouldn’t* have plunged, I agree.
I don’t think you distinguished between my pre-meeting action plan (“no way will I hold TLT”) and immediate post-meeting one (“fade the sell off and buy TLT calls”). Read my posts again.
My only loss is opportunity cost (if TLT doesn’t drop after rates are hiked)
PS it’s dead obvious that front rates will rise, which is why I also wrote to short SHY (iShares 1-3 Year Treasury Bonds ETF) as a hedge if you hold TLT near a FED meeting
http://ibankcoin.com/flyblog/2016/05/17/cramer-bulls-are-gonna-have-to-pray-to-yellen-multiple-rate-hike-loom/#comment-489904
@btn look what happened in December TLT plunged around the hike then blasted off higher the first few weeks of January. Fed only can control short end long end controlled by growth and inflation and there is none.
good point moneybagz,
So wnat you are saying is that TLT will drop from a FED hike, but a smart investor should go long TLT after the hike, like maybe buy TLT calls or something?
Maybe they should short near maturity bonds, too?
Wish I had thought of that and posted it 3 times…oh, wait, I did
lol
btn for the win
now just hope you dont get cancer cancelling it out
20+ beers yesterday, albeit of the plebian variety is impressive. Andre the giant of WWF fame is rumoured to have had 150 in one sitting.
Chart:
https://research.stlouisfed.org/fred2/series/T10Y2Y
So, it was actually between 1 and 0 between 1995 and 2001 while stocks went on a rip your face off rally. Hmmm…
Exactomundo. Whether we like it or not, rates are rising. I’m a tad bit younger than fly in legal terms. Those were the days…..I put candy dealing and lawn mowing money into a CD after all of my starter kits attire, which was like 7%? This afforded me to get the chick magnet of my dreams in the Mazda 323 a few years later.
And most recently from the end of 2004 to 2007, stocks went up while the spread was below 1 (and below 0 for some time) before the recession ever hit. I don’t know man. I think we’re early on this trade unless their is another catalyst out there that is hidden. Like toxic F’ing mortgage loans or something to that affect.
I don’t think many on this blog are old enough to have been too early, considering 20- and 30-year rates have been falling (and bonds rising) since 1981. Of course, there is opportunity cost to consider for those wishing to nail the top.
give recession a chance
Knowing saving the greedy-bastard generation in place of other generations would only cause shockwave-shattering displacements and distortions is true prophecy
Better yet, let’s make recessions great again.
Let’s all remember this:
In 2016, after a 35 years bull market, many bonds in the world reached negative yields. Lenders were paying the likes of Italy and France and Spain and Japan to have the privilege of lending them money.
Fly, thanks to its long investing experience decided to buy, it was “a no brainer”.