How to Profit from a Bond Collapse
Yesterday I outlined my concerns with the Treasury market.
For those of you who missed it, the rundown of my framework is as follows:
- The US was on track to run a $1 trillion deficit this year before the COVID-19 pandemic.
- The recent stimulus program and credit facilities mean the deficit will likely surpass $3 if not $4 trillion.
- Multiple states (NY, CA, IL) are on the brink of insolvency and will need bailouts soon. This will make the deficit even larger.
- The president has suggested he’d like a massive infrastructure bill passed this year. This too will mean even MORE debt being issued/an even larger deficit.
Add it all up, and the US will likely issue $5 if not $6 trillion in new debt this year. And this is on top of the trillions of dollars’ worth of debt it needs to roll over.
The Treasury market is signaling this might be too much for it to handle at current yield levels.
Warning Signs from the Bond Market
The long-term Treasury ETF (TLT) is a good proxy for the long end of the bond curve. And this chart is telling us that we could see a nasty drop in the bond market in the coming weeks.
TLT is sitting on support (green line below) in the middle of a massive expanding pattern. A break below that green line would mean a sharp plunge to 145.
One way of profiting from this would be the UltraShort Long Treasury ETF (TBT).
TBT returns 2x the inverse of the Long Treasury ETF (TLT).
So if TLT falls 5%… TBT returns 10%.
And if TLT falls 10%… TBT returns 20%.
I want to stress that you should NOT consider opening this trade until TLT breaks below support (the green line in the chart above). So put this on your watch list for now.
Editor, Money & Crisis