I’d like to buy long-end US Treasurys right now. And I did, both this week and last. But not (nearly) as aggressively as the “contrarian” in me wanted to.
I’m not a “contrarian” in the sense of the term as it’s typically bandied about. In fact, I’m remarkably (oddly, some might argue, in the context of my affinity for hazardous side ventures) “consensus” when it comes to managing my investments.
By “contrarian,” I just mean the discipline I exhibit when it comes to “buying humiliation,” to borrow a phrase from BofA’s Michael Hartnett. “Buying humiliation” just means taking the plunge on assets that’ve suffered an Icarus moment.
I take that plunge as a matter of course, but for a lot of investors, it’s psychologically difficult to put money into something that’s recently cratered in price. The same way it’s (dangerously) easy to throw money at something that’s experiencing rapid price appreciation.
Suffice to say “buying low and selling high” is a strategy that’s easier celebrated rhetorically than implemented consistently.
But not for me. I’ve never had to “hold my nose and buy.” I’d say that’s a product of the risk desensitization that goes along with having put my freedom and life on the line in pursuit of financial gain, but it’s actually not that. In fact, it’s in some sense the opposite.
Notwithstanding my reconnaissance mission into crypto and DeFi, I’m never in the market for speculative financial assets. I get my fill of thrill outside the casino. There’s nothing in any of my brokerage accounts, let alone in my IRA, that I’d be embarrassed to show someone. No aberrant CUSIP, no deviant ticker.
When you “buy humiliation” and you limit your opportunity set to blue-chips and unlevered ETFs, you’re not actually “taking a plunge.” There’s no need to “hold your nose and close your eyes.” On the contrary, when that’s your strategy you’re basically playing with loaded dice. All investments are gambles, but you can stack the deck.
I’d argue Nike’s a good example of asymmetric upside (yes, I bought some), and I’d like to believe the same’s true of the US long-end. I’d very much like to back up the truck at these levels on, for example, VGLT. And as Hartnett alluded to in his latest, ZROZ is the poster child for “humiliation” right now.
There’s the chart. (If you’re unfamiliar, think of ZROZ as a de facto leveraged duration bet relative to something like TLT. The “juice” comes from STRIPS, not borrowed money or derivatives.)
So what’s the problem? Well, where to begin? In the near-term, I’m a bit unnerved by the long-end’s inability to hold any sort of rally. That to me suggests ongoing, “structural” selling pressure.
I’ve seen enough of that by now (and similar price action in other G7 bonds) to believe some version of the yen carry unwind narrative, although I’d note the heavy corporate slate was surely a factor last month too.
The figure below’s simple. It just shows the weekly change in 10-year yields.
This week’s increase, 11bps, was the fifth in a row and the seventh in eight. I reckon that counts as “inexorable,” and while you’d be inclined to believe current yields count as a generous concession, previews of next week’s supply events betray a demonstrably cautious tone.
“Much has been said about the fiscal outlook in the US and the implications for Treasury issuance going forward, contribut[ing] to our worry that the 10- and 30-year auctions could struggle,” BMO’s Ian Lyngen and Vail Hartman wrote. “Furthermore, given that the September payrolls report has undermined the odds of an October Fed hike, there will surely emerge questions regarding the [FOMC’s] level of conviction on fighting inflation.”
Those latter questions are even more pressing in the context of Donald Trump’s remarks to TIME. In keeping with his penchant for saying the quiet part out loud, Trump floated two ideas for “solving” America’s debt problem. One was the standard “We’ll grow our way out of it” liene, but the other found Trump explicitly saying America can inflate the debt away. “You know, certain levels of inflation will also pay off [the] debt very rapidly,” he said. “Very rapidly.”
True or not (it’s true, although I wouldn’t use the term “pay off”), that’s the sort of thing that makes me hesitate about catching the falling knife at the long-end of the Treasury curve. Indeed, even the friendlier, “Grow our way out of it” strategy doesn’t exactly scream “Buy bonds.”
The figure, from the BMO note cited above, shows you the long run history of 10-year yields with nominal GDP growth. The implication’s clear: The current rate of expansion suggests more upside for bond yields.
“The post-COVID economy has experienced structurally higher nominal GDP growth than much of the 2010s owing to the combination of resilient growth and persistently elevated inflation,” Lyngen said, editorializing around his chart and noting that the 10-year moving average for nominal GDP’s tracking at 6.1%, the quickest pace for that metric in more than three decades.
Of course, whenever something’s “humiliated” to the extent the US long-end is currently, there’s usually a long list of reasons to explain why no one wants what everyone’s selling. In that regard, the bear case for long-end US Treasurys is no different from the bear case for Nike in 2026 or Meta in October of 2022 or equities in general in late 2008 or me in 2016.
I bought a fair amount of Meta at the October 2022 lows. That turned out pretty well. As recounted in “Where Were You When The World Didn’t End?,” I put my entire closet safe on the line in equity index funds after Lehman. It took a while, but that worked too. And I bet heavily on myself in December of 2016, when the only other person willing to venture a cautious bull case was Tracy Alloway (and I think that was just moral support; if I were a stock, I doubt she would’ve actually bought any). Fast forward a decade and… well, tell ’em, Curtis.
So I guess it’s VGLT and ZROZ next week. A lot of both. I’ve taken bigger risks in my life. Hell, in the past two weeks.
Disclaimer: For entertainment purposes only. (Are you not entertained?) Not investment advice. Don’t try this at home. Any of it.
As a true bear, what I fear most is watching something I own crater in value. When you invest in cratered assets, much of that concern has already been removed (assuming it is essentially a sound asset to begin with). As I have mentioned here before, I bought gold in 1997 when no one wanted to touch it. I felt like a thief then and have never regretted it. I bought Ford after the GFC — at about $2 a share — and did OK there too (although I now wish I had bought Apple instead!) I am buying U.S. bonds now, and they may go even lower, but they are already cheap(er), and old Lady Liberty’s debt is still the cleanest shirt in the laundry. I don’t see Kevin Warsh being allowed to go “full Volcker” anytime soon, and if things do roll over, bonds should be bid-up very quickly.
I’m an applied observer here, learning as I go from you and many people who contribute, thank you H for the platform and personal disclosure orientation – my favorite daily read (I have 3 which includes my wife).
I acquired a third of my assets buying deep discount T-bonds using other peoples’ money during the Volcker years, with nearly all of the income from long-term capital gains. I also bought into a few bankruptcies in both the public and private sectors (Detroit, Harrisburg, Birmingham, Peabody, and many others. I have a theory. The future comes from two kinds of inevitabilities, those things that cannot happen and those things that must happen. Betting on either of those virtually always works (for me alt least).
Selling from people funding carry trades with yen makes sense. As does some de-risking from good old American leveraged carry traders. This is super important. A while back I referenced a table of buyers of UST. The only group which had been stepping up their buying recently were carry traders.
(PS – I’ve noted your fondness for Tracy in some earlier postings as well. I share that but, luckily for her, we never met in person or even coresponded!)
I repeat my comment of several days ago: we should be thinking 1980 (Volcker) not 2002 levels for highs tn 10yr rates. Buy at 10%+
We should, but the USA can’t handle those rates. We’ll get YCC instead, or some sort of cap. Perhaps that breaks down and we get what you are suggesting, but the establishment will try to suppress it beforehand. We can discuss “real” rates in these scenarios versus “nominal” but benchmarked against what? Gold? My preference is EDV over ZROZ. Not investment advice.
With the caveat that anything’s possible, there’s no scenario in which yields will be allowed to reach 10%. That’s not something the system can handle anymore. The read-across of that for e.g., corporate borrowing costs when IG supply’s ~$2 trillion/year, mortgage rates, equity multiples when consumer spending depends heavily on buoyant stock prices, and so on makes that a non-starter.
With Volcker we had no cap but the commercial Prime Rate reached 20% and short term Treasury rates went to 18%+ I paid 9-9.5% for each of my first three houses. We can take it.
That was half a century ago. This is an entirely different world. A 20-handle prime rate would mean credit card APRs of ~37%. Higher for people with poor credit. Americans have $1.35 trillion in outstanding credit card debt and related securitizations. Used car loan rates would be — I don’t know — 25% probably? If mortgage rates doubled to reach the highs during the era you’re talking about, virtually no one would be able to buy a house. The median annual income is ~$80,000. You need ~$115,000 to be able to comfortably afford the median priced home financed @6.5%, which is to say the “median” family isn’t even close to being able to comfortably make the math work as it stands right now. That math @18% would be laughable. And Jesus Christ: The implied de-rating for US equities from, say, 15-handle 10s would constitute a reverse wealth effect of catastrophic proportions. The Buffett Indicator was sub-50% in 1980. It’s 250% today.
I realize this might sound somewhat incongruous with what I said about blue-chip corporates and well-to-do households being insulated from higher rates, but I obviously wasn’t talking about rates this high.
With long real rates well north of 3%, it would seem that, at least in tax sheltered accounts, long dated low coupon TIPS would be a natural fit along with VGLT and ZROZ.
Whenever I buy an investment that I like, I tell myself “this might be a mistake, but it won’t be the last mistake I ever make.” The road to wealth has many detours and potholes.
The dipstick for the health of a nation’s economy and more importantly the mood of its citizens is inflation. History is replete with examples that raise neck hairs. Take recent US history where the leader attempted a coup, was rightly expelled from his own party only to return to power in 4 years because the electorate disliked inflation more than an authoritarian power grab. One lesson; how frightenedly fast events can change with little advance notice. Underlying most of our investing logic is the belief that ‘democracy’ will hold no matter what. In rock, paper, scissors money can trump liberty. With that being said, I too bought some longer dated debt.
AI just might be the fuse to an explosive reordering of social order.
From today’s FT:
“A recent Pew survey of more than 5,000 Americans found that while 18-29-year-olds were the most likely to use chatbots, they were also the most pessimistic about AI. Some 48 per cent said its impact over the next two decades would be negative for society, while just 14 per cent said it would be positive (compared with 40 per cent and 16 per cent, respectively, for all adults)”
I still regret not listening to you back in 2020—you called it right that oil wouldn’t crash overnight. It was a great trade, even if it wasn’t your absolute best. Bot shining mental @379 last week. And thanks in advance for the new tip.
Well, oil did crash. Specifically, it went negative. Ha. What I said was that irrespective of the COVID plunge (note that you could’ve bought XLE for $12 at one point when the combination of the pandemic and the Saudi-Russia price war cratered crude), energy ETFs were too cheap. So if you looked at VDE, for example, in January of 2020, it had only been cheaper on a couple of other occasions since the GFC.
And on VGLT and ZROZ, I think I made this pretty clear in the article, but just in case: This is by no means a sure thing. We’re talking about bonds here. They’re a whole different beast. Everyone knows the bear case, and it’s multi-faceted. But, again, that’s usually when it’s time to buy: When the bear case is the most convincing and everyone’s already acted on it.
H man, what level of returns % wise are you expecting to achieve from VGLT and ZROZ? These are bonds so chances are the performance won’t be anything worth writing home about, unlike your previous ideas with equity names.
Well, a ~100bps decline in yields would work out to ~20% or so on the long bond over the next 12 months….
Yes, respectable but not multi-bagger like your other ideas!
Just how important are treasury purchases from oil-state money to propping up the price of T-bills? I know the Saudi’s have gone from being buyers to borrowing money.
The chart mostly shows the inflation effect on nominal growth. Subtracting the former from the latter gives around 1.5% to 2% underlying (real) growth post Covid. Considering the amount of monetary and fiscal stimulus in that period, I don’t think I’d celebrate the “resilience” of post-Covid GDP growth as BMO do.
On the investment side, I’m doing something similar with some non-callable IG perpetual preferreds. Even longer duration, yields up to 7%, and credit risk not much greater than the US government.
If I am understanding this correctly, the Social Security Administration currently holds $3.0T in US Treasuries that will need to be sold in the next 8 years, in order to have the cash needed to pay benefits. If that is correct, that $3.0T is debt will need to find a new lender….. I think that is in addition to the borrowing that needs to occur because of the budget deficit. Yikes!
Aaaaand, I’ll take some profits this morning on ZROZ already. Told you so.
Hahaha, you beat me to it. I was literally going to ask you today at what level you’d hit publish on your “I told you so” article. I guess I have my answer.
To be clear: I did not make a ton of money in absolute terms here, and I’m keeping most of what I bought because while 8% in a week’s great, I didn’t put enough on this in the first place to accept anything other than a double-digit gain on the overall position. In other words: I’m gonna need at least twice that gain to make this mean anything.
10% now.