Buy Bonds, Wear Diamonds

Published on: November 19th, 2018

Raoul is a frothing-at-the-mouth bond bull…


  • ag
    anthony g.
    19 November 2018 @ 15:35
    great commentary. Idea ...... Do you have any shorts in the financial space to take advantage of mortgages going South in the USA and/or Canada ?
    • AM
      Alonso M.
      20 November 2018 @ 17:00
      Might be better to look at Canadian retail from the short side if you want to make a bet against Canadian housing. The Canadian mortgage market is segmented and not all that transparent. Many of the players in the alternative mortgage space are in the extend and pretend game.
    • AS
      Alan S.
      19 November 2018 @ 21:52
      The Canadian debt / mortgage numbers look horrific, but do not forget the figures are heavily skewed because of the cities of Vancouver and Toronto and the problems Province of Alberta will undergo. There are 36 million Canadians, with Vancouver, Toronto and Alberta accounting for roughly 13 million, so the vast majority of Canadians are not in 'high' priced cities. And keep in mind, we have six large banks that spread their business across the entire country/population. Not saying there would not be a housing problem, but it is more limited than the aggregate numbers would indicate.
  • MS
    Mark S.
    19 November 2018 @ 16:21
    Thanks for this. You often reference rate of change as an important indicator. Does the rate at which oil dropped mean anything to you? If so why? thanks
  • MD
    Michael D.
    19 November 2018 @ 17:04
    Can you give some alternative instruments with which to play this if one doesn't have access to the futures market?
    • MS
      Michel S.
      19 November 2018 @ 20:48
      TLT is a Exemple
    • JL
      J L.
      19 November 2018 @ 19:10
      ishares has a range of ETFs for going long treasuries 1-3y 7-10y and 20+y in many currencies, listed around the world. Just check their website and choose the most cost efficient for you. As far as I know there is no way to play long 1-3 month treasuries through an ETF except for ticker BIL which is exclusively USD denominated. If anyone knows about something in EUR or GBP please let us know! Thanks
  • AS
    Alan S.
    19 November 2018 @ 21:44
    Why TLT and not IEF?
    • AM
      Alonso M.
      20 November 2018 @ 16:53
      Raoul's response to the November Insider Talks addresses this. Kind of hard to make an active call on this unless you're really into trading fixed income. In my opinion, if you assume a bull steepener, it's probably reasonable to assume some drift lower in long bond yields. One has to try to quantify the basis point moves along the curve and figure out where the best bang for the duration buck rests on the curve. Mission impossible for me.
    • JL
      J L.
      20 November 2018 @ 14:32
      That's not necessarily the case. If FED funds needed to be cut quickly to 50-100bp that could drag the middle of the curve lower with 30ys possibly behaving more independently. Personally don't think this will happen though, as I think whatever the FED does the market might take as a signal for what is to come in decades really...
    • FM
      Fraser M.
      20 November 2018 @ 10:22
      Because you have more duration in TLT than IEF due to longer maturity bonds in TLT (20+yrs) vs IEF (7-10yrs). This means TLT will be more sensitive to lower interest rates.
  • PM
    Philip M.
    20 November 2018 @ 03:27
    Rookie question on 2021 Eurodollar trade construction with the previous long vertical option trade: similar to 2018? (long DEC2021 98.75 calls / short DEC2021 99.25 calls)
    • MB
      Matthias B.
      22 November 2018 @ 13:08
      hi Jonathon, unfortunately Saxo allows only June 21 but on these, I see the mid-volatility for 98C at around 88%! is that a normal level or is that a misinformation? tks a lot
    • JH
      Jonathon H.
      21 November 2018 @ 09:27
      Phillip you can just go long the futures (be aware they may bounce down to 96.70 or so, shouldn't break much below if Raoul is right), long calls or the call spread. Raoul ahs described this trade as the lottery ticket, you can buy DEC20 98.0 calls for ~17:1 payoff or the spread which limits your upside. FWIW I am splitting across Dec 20/Jun 21/Dec 21 futs and am currently buying the calls at 98, plan to scale up on futures if we see a strong move above 97.20 or so (Dec 20). At present just accumulating futures on weakness, the calls are much easier for me to hold as I write off the cost up front and sit back to watch.
  • NO
    Neil O.
    20 November 2018 @ 14:01
    This is one of that unusual category of research to download, print out, read, re-read and don't forget!
  • DH
    Damian H.
    20 November 2018 @ 14:38
    It appears that the Eurodollar and Treasury Note Futures contracts require minimum capital of US$200K+ for each contract. Is this correct or am I looking at the wrong thing? If so, are there lower capital requirements alternatives so that we can start small and then build on the position as the momentum builds? The comments below reference iShares ETFs so that appears to be one alternative?
    • JL
      J L.
      20 November 2018 @ 22:07
      The capital to carry one long 250k Dec19 Eurodollar contract on Interactive Brokers is under 500$ or less than 0.2% margin. I am UK based.
  • CS
    C S.
    20 November 2018 @ 15:09
    GOOG $1004
  • LM
    Lawrence M.
    20 November 2018 @ 15:59
    Read yesterday, opened a bond position today (as the market shows weakness). Thanks, great timing!
  • JM
    Jerry M.
    20 November 2018 @ 16:44
    Hi Raoul, Great piece! I'm trying to look for suggestions on how to balance being heavy this Bond market trade via TLT and also keeping enough dry powder to take advantage of what appears to be a big short opportunity once the S&P rallies. If you had to give a weight percentage of bonds versus dry powder (cash) for shorting how would you allocate? Do you think the bond move may work out first which means you could exit that position to take advantage of the short opportunity?
  • JC
    Justin C.
    20 November 2018 @ 22:59
    The first forecast I saw about the downturn in the business cycle was by ECRI way back in May. It made sense then and still does. The only thing I do not understand is how bonds can rally so hard when there is supposed to be excess supply with QT and fiscal stimulus?
  • HO
    H2 O.
    21 November 2018 @ 15:16
    I agree that after the December hike the Fed will take a pause, and am expecting QT to pause indefinitely as well by the end of Q1. But it may still be too early to go all in on bonds. Big reason is US deficits and the probability that there will be some kind of infra program for the US next year. This may be enough to keep the US out of recession, if just barely. The compromise (for now) seems to be putting on a steepener, reserving judgement as to whether it is of the bull or bear variety until Q1.
  • DV
    Dale V.
    22 November 2018 @ 17:41
    Here some conclusions based the first 2 graphs from a nonfinancial retiree (wanting to preserve retirement capital) reading the data: 1. 2008 crash: related to LIBOR (liquidity problem). 2. 2000 crash: LIBOR not a significant factor. 3. Current risk is based on LIBOR (liquidity) issues. 4. Hard data is delayed roughly 6-12mo relative to market and LIBOR rates of change. 5. Sell market now or soon. 6. Based on LIBOR expect market bottom about 18mo or longer from now 7. Buy treasuries with greater than 18mo maturity, say roughly 5 years. 8. Reenter market up selling treasuries after market bottom. 9. It would be helpful to plot the 5 or 10 year treasuries on the same graphs. Please comment!
    • MW
      Marco W.
      25 November 2018 @ 14:41
      My two cents' worth. For LIBOR (the offshore USD rate), one need to figure out the usage of the borrowed offshore USD: 1. whether it is borrowed for personal consumption/investment purpose like Hungarian taking swiss franc housing loan before 2011. (I think yes in Europe before Greek crisis and in Asia before 2014. Probably no after 2014.) 2. whether it is borrowed by corporates in Europe or Asia for domestic capital expenditure. (I think similarly as 1). 3. whether it is borrowed to invest in US, especially passive investment in FANG? (I think no before 2014 and yes after 2014). Due to the difference, the USD squeeze in 2014 was much more powerful than in 2018 because unwinding the FANG trade now could involve buying USD to cover the loss and selling USD to bring the profit home, depending whether one is in loss or profit. For 2019, the liquidity issue will most likely arise from reversal of passive investment and Fed will respond because it is US market issue, not only oversea issue.
  • TS
    Tyler S.
    23 November 2018 @ 21:15
    Has anyone floated the idea of doing a Master Mind group for these posts? I'd be willing to host one through google hangouts but I would need people to talk, last mastermind I put together I was one of 3 people who willing to talk. Goal: see how people are playing this and why they chose that path.
  • DS
    David S.
    25 November 2018 @ 18:45
    Nice theses, and well explained (Economic slowdown will cause the Fed to pause > investors jump across to treasuries > with a possible short squeeze to assist the move). So this describes one part of demand. Some other parts of demand are declining (eg. Foreign central banks). I’d be interested to hear from Raoul what effect he thinks the big increase in supply will have next year (due to QT and the increasing deficit). Is it all a matter of time-frames..? I.e. bonds rally now due to the initial perceived slowdown, but then yields climb next year as massive amounts of new government paper come onto the market?
  • DB
    Doug B.
    26 November 2018 @ 05:47
    Colour me confused. Two weeks ago Julian quoted Powell: "We may go past neutral, but we're a long way from neutral at this point, probably", and restated his view that the bull market in long bonds is over. Then a few days ago Raoul says "Just buy bonds" is his strongest held view in five years. If Julian and Raoul are so far apart on this, how is a poor retail investor like me supposed to make sense of it? I know Raoul is talking the next 18 months, but I don't see room for that play consistent with Julian's position. If two macro titans are in significant disagreement, shouldn't us mere mortals just stay away?
    • LD
      Lance D.
      26 November 2018 @ 20:43
      The bond thing got me confused also, I have decided to keep away from the bond trade. I will come bk to it when it is far more clear I’m not to critical on the guys because their views however confusing do hold some educational value also they have held our hands to some gains . I’m just boxing of bond trade for now tho .
  • VG
    Vivek G.
    26 November 2018 @ 14:06
    Hi Raoul - great article. Using TLT, could you translate the actions you recommended in your article (Eurodollar 2 y/10 y) so one can consider taking a position using Options on TLT? And when should one commence building a position (ie Buy Calls on TLT/which tenors etc). At Julien and you now aligned on this approach? Regards
  • MF
    Marc F.
    27 November 2018 @ 09:26
    Hi Raoul - I have similar query to the ones posted below. If you can bundle them up please feel free to do so. Would you share your view on what will happen with the sheer supply of bonds being sold in the market when the FED starts removing the buying backstop through QT, even if there is a higher open market demand.
    • DS
      David S.
      30 November 2018 @ 17:15
      QE4, here we come.. Who else is going to buy all that paper...
    • RP
      Raoul P. | Founder
      30 November 2018 @ 15:36
      They wont be able to carry out QT for long so I dont think its an issue.
  • CP
    CRAIG P.
    27 November 2018 @ 19:29
    To my knowledge, no one has recently contrasted Raoul's bullishness on bonds directly with the prospects for "BBB" investment grade bonds to fall off the cliff into the valley of the junk (Danielle DiMartino-Booth's thesis). My understanding is that the "great recession" saw the bond market, some might say, split into two markets: government securities and everything else. Raoul, is there a reason you have not covered this topic? I would think that it makes sense to either address the BBB list and its prospects (or lack of prospects) to affect your macro view. Or, to clarify that when you say "buy bonds," you are specifically referring to US Government bonds (or whatever else falls into the category of being immune from BBB infection).
    • RP
      Raoul P. | Founder
      30 November 2018 @ 15:37
      Long gov bonds, short corp debt. The BBB to junk status that GE is about to go through is a HUGE deal and could easily sieze the credit markets.
  • RK
    Roger K.
    30 November 2018 @ 06:47
    Hi Raoul, According to the graph (TLT vs SPX), TLT has been very lagging to react to the SPX downturn historically. Given that fact is this the most effective vehicle in a time of the economic downturn? Thank you
  • VG
    Vivek G.
    1 December 2018 @ 06:25
    Hi Raoul Greatly appreciate your feedback on my comment of 26 Nov. Regards