A Contrarian Bond Bet

Published on
June 28th, 2019
9 minutes

A Contrarian Bond Bet

Trade Ideas ·
Featuring Thomas Thornton

Published on: June 28th, 2019 • Duration: 9 minutes

Tom Thornton, founder of Hedge Fund Telemetry, discusses his bearish view on the 10-year Treasury note, reveals where he thinks yields are headed next, and reviews the technical setup he outlined in a Think Tank note on June 27. He applies Demark Indicators on bond futures, yields and ETFs to pinpoint the end of the aggressive rally, and considers playing the thesis with an options trade, in this interview with Justine Underhill. Filmed on June 26, 2019.



  • MT
    Mike T.
    4 July 2019 @ 08:17
    Mr Thortons structure of his long put spread i.e. buy 35 Delta sell a 10 delta is perfectly viable but is not imho mathmatically optimal as it sets up as a negative Theta i.e. time decay will be working against the position. This is not the forum to get deep into the weeds of different methods of expressing directional positions using options, but as a guiding principle one should always look to place trades that have positive decay (positive Theta) i.e. time decay is working for you. In the case of a debit spread this is achievable by ensuring the 'intrinsic' value of the long option is greater than the value of the debit paid for the spread normally achieved with buying an ITM option and selling an OTM. Often one has to experiment with the position of the strikes in order to get positive theta number prior to entry.
  • JL
    Jinny L.
    1 July 2019 @ 00:24
    i think both rosenberg and thornton can be both right as their time horizons are different. tommy's trade is more tactical and shorter in time horizon and rosenberg is probably much longer like lacy hunt. hard to refute tommy's tactical bond short with specific risk management but i rather just size my long bond position and just take some profits instead of actually shorting bonds. i have disagreed with tommy's ideas in the past but have enough respect for him to not entirely dismiss his ideas and rhetorics.
  • TT
    Tommy T. | Contributor
    28 June 2019 @ 18:44
    Just to add a little specifics to the TLT put spread. When I look for a put spread I like to buy a 35 delta and sell a 10 delta. The TLT August put spread I like is to buy the August 130 puts for ~$1.00 (actually a 32 delta today) and sell the August 126 put for ~$0.25 for a net cost of $0.75. If held through the lower strike in August it would be worth 5x. By the way, after filming this on Wednesday at Real Vision in NYC, I was driving home and saw David Rosenberg on the street in NYC walking in front of my car. I've never met him and have tons of respect for him. We shared a glance like we knew each other. Quite a coincidence since we are on opposite sides of a this trade.
    • AM
      Artur M.
      30 June 2019 @ 21:31
      Quite funny, that you bumped to each other
  • cb
    christian b.
    30 June 2019 @ 02:11
    TLT - 2014 -2015 - bull run had few pullbacks all shallow this looks like that ..on wkly - this imo a trade for the nimble 50% retrace ..bold going into 2020 a steady Get Trump at all costs vibe.. hard to make that bet
  • RP
    Ryan P.
    29 June 2019 @ 20:13
    I agree that the rally in bonds is due for a pull back... but disagree when he says earnings won't be that bad. Companies slashed their forward outlook and set the bar very low, so even if they still beat "estimates" it's still deceleration y/y.
    • TT
      Tommy T. | Contributor
      29 June 2019 @ 21:34
      Perhaps I should say earnings won't be received that bad? Micron has 150 days of inventory still and pricing continues to drop but the stock ripped on the hope for some tariff relief. The 3rd quarter earnings will face the toughest comps and if the markets look past the coming Q2 earnings and the equity market rallies into Fall, then you might see the bond market start to rally again. There's a lot we don't know about fundamentals going forward in the next couple months but my technical work combined with sentiment skews the risk reward better as selling bonds here.
  • PB
    Paul B.
    29 June 2019 @ 17:36
    Excellent video Tom, great work as always.
  • JH
    Jesse H.
    28 June 2019 @ 21:43
    Trade idea vs. Rosenberg’s more comprehensive piece, so hard to compare the two...and as someone else here said, different time horizons. I also see possible uptick in yields, shorter term, followed by longer term shift downwards in yields as US and global debt burdens start to be realised at corporate and sovereign (and household) levels. Then eventually US yields may move much higher as dollar loses Int’l reserve currency status (yes, call me nuts, but within 5-10 years, I see USD not being reserve currency anymore). Not sure what exactly will replace it, though. Cheers.
    • CM
      C M.
      29 June 2019 @ 00:31
      Wrote a longer note below, but don't see time horizons being that different. Fed meets in 30 days and Tom is proposing August options. If you believe the Fed will cut and agree on David's argument that the first move is 50 bp, then you have the scenario that Tom said makes this trade fail.
  • CM
    C M.
    28 June 2019 @ 14:34
    Will Tom's charts be correct or David Rosenberg's fundamental view of bonds win out? Good contrasting arguments. Personally, believe David (and Lacy Hunt) is going to be proven right as the Fed moves to cut 50 basis points. While the PR coming out of the G20 this weekend may be positive, it will be all talk and no action. And as the economy continues to slow, Fed will move aggressively as they have in the past. With a short runway, they will need to do something that gets attention and a 50 basis point cut will do that. So will take the other side of Tom's short though agree there could be a small movement up in rates, it will be short lived.
    • AM
      Alonso M.
      28 June 2019 @ 19:46
      They might both be right. Time horizons are very different. Tom is giving a trade recommendation whereas Rosenberg is talking macro economics which leads to investment ideas.
    • CM
      C M.
      29 June 2019 @ 00:28
      Not really that big of a time horizon difference. Tom posted a note above about buying August options. The Fed meets in late July. Tom says a threat to his trade is a 50 bp move. David makes a clear argument that the Fed's first move will be 50 bp. The market says there is a 100% chance of a 25% bp move in July and 26% chance of 50 bp. Would have to go back and watch David's video, but guessing he did not predict a move necessarily in July, but just said the first move will be 50 bp. So, you are making a trade based on the next 30 days and whether the Fed will cut in July. If you believe the Fed will cut and you agree with David's argument, then Tom's trade will not work out.
  • CL
    Chris L.
    28 June 2019 @ 15:22
    It's funny. I had this view in late March. Still have it. I would try to engage Raoul with his bias but never responded, so at least Tommy can give us tactical bond bears a voice. Themacrostrat
  • SB
    Stephen B.
    28 June 2019 @ 12:50
    Great guest and a great interviewer.