A Long-Term Inflation Play: Short Treasuries, Long TIPS

The idea for this came via a friend, and then I looked a bit more into it. Basically the spread between inflation-protected US government bonds and standard US government bonds has become extremely small vs. history and even potentially nonsensical, which could be due to panic buying of US government bonds as money has sought a safe haven. Some investors might just have a mandate for plain bonds, rather than TIPs. Or perhaps there still isn't enough liquidity in the TIPs market to accommodate everyone.

As a reminder, TIPs are US govt-backed just like standard bonds, plus protect for inflation. The odd thing is that right now, 10-year TIPs have a yield of 2.2%, vs. US 10-year treasuries at 2.47%. This is only a 0.27% spread despite TIPS carrying inflation protection, and means that the standard treasuries are priced as if US inflation will average just 0.27% per year for the next 10 years, which seems highly unlikely. While this market oddity didn't just happen, it nevertheless still exists, thus there could be an interesting opportunity if one were to create a trade based on the expansion of this spread going forward. Something along the lines of short treasuries, long TIPs.

I am unintentionally Long TIPs and short Treasuries right now, but there is probably a better way to do it than I have unintentionally set up. A spreadsheet and some leverage could probably be one method, but given the times this is probably not the most popular way to explain a strategy! So perhaps just be unsophisticated and plain short treasuries.

Comments

[bc818:]

short the treasuries with symbol TJT. Buy symbol TIP is the easiest and strongest way to play this. If you dont like the double short (TJT) just get the standard short.

Jan 07 10:31 AM

[bc818:]

Sorry thats TBT not TJT for the double short 20 year treasuries.

Jan 07 10:32 AM

[Glen Bradford:]

I agree, TBT. Woohoo!

Jan 07 05:22 PM

[igggy:]

One thing people often forget is that the double ETFs has a bad tendency to drift down in a flat market. So you might lose money even if treasury yields and prices somehow end up at the same level a few months from now.

As an example, if a stock goes down 20% one day and then back up 25% the following day, the final price is the same (because 0.8*1.25=1). A double short ETF would end up down 10% because 0.6*1.5=0.9

For this reason, instead of buying TBT it's better to short TLT if you can. You'll be up even if prices stay flat.

Jan 08 12:57 AM