Trade Alert

Shorting long-dated US Treasury Bonds. Starting with a US$25k position

_{Posted by Club Member Sammy Theeee 21.8.23}

Saw a couple of posts here calling for higher US bond yields. I agree, I’m shorting long-dated US Treasury Bonds. Starting with a US$25k position, might size up/down accordingly.

Short summary of my investment thesis:

Inflation expectation = 2.5% to 3% (I think inflation will be sticky given the strength of the US economy right now)

Real rates = 1.5% to 2.0%

Term Premium = 0.75% to 1.0%

Sum of all three component implies that long dated US treasury yields should be around 4.75% to 6.0%.

The US labor market remains tight and the unemployment rate remains very low. The US economy is expanding, therefore given the strength of the economy, the Fed has no incentive to cut rates. More likely that rates will rise higher than the markets expect, or at least stay higher for longer than is currently priced in.

The three largest buyers of US government bonds: US Fed, China PBOC and Japan BoJ are no longer in play, at a time where the US Treasury will be issuing a lot of new debt. US Fed won’t be buying as they are still in Quantitative Tightening (QT) mode, China and Japan more likely to be net sellers of US treasuries than buyers given the need to support their currencies. There’s news that the PBOC has already instructed state banks to support the Yuan. Weakness within the Chinese economy and deflation risks are pushing regulators to cut interest rates which would put further downward pressure on the Yuan, which in turn would mean more need to sell their US treasury bond holdings to raise the required US dollar in order to buy the Yuan. Same story with the weak Japanese Yen, it’s now at levels where the BoJ has historically intervened to support the currency.

Over the near term, I do see the PBOC, BoJ and US Fed as net sellers of US government bonds, plus the new issuance that will be coming from the US Treasury over the coming months, the markets will need to digest a lot of US Treasury bond supply, which is why I see US yields heading higher.

The markets are already beginning to price this in, yields for the 10-year US Gov bond has been rising, from 3.4% in April this year, to 4.3% today!

#New Ideas #US Yields #Interest Rates #Fed

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