- Global economic concerns are real.
- Domestic economic concerns are real.
- Bond market investors are traditionally smarter than stock market investors.
Do you really want to short the long-term U.S. Treasury bond?.
If you do, the best play is to do it using the ETF that shorts the longer term U.S. Treasury bond, like the ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT).
However, although I do not like the yield on long-term treasury bonds and I have recommended to all of my clients that they get out of their bond funds because interest rates will clearly not stay at these levels forever, the immediate outlook for long-term U.S. treasury bonds is more favorable than unfavorable.
My recommendation to clients to get out of bond funds has everything to do with the repayment of principal because bond funds will not repay principle, they are not guaranteed to do so, and they are not scheduled to do so. If interest rates eventually increase, anyone invested in bond funds will lose principal based on the inverse relationship between interest rates and prices. That makes bond funds a horrible place to be for the long term.
However, on a shorter term basis, investors who are interested in the long-term Treasury bond could look to the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT).
Our observations suggest that the probability of continued interest in the long-term U.S. Treasury bond is higher than a complete reversal in trend it 'cause of the risk factors surrounding the global economy, the domestic economy, and the stock market in general.
Beginning with the stock market, our observations and those that we read regularly in the media suggest that smaller investors are more active now then they have been since the credit crisis. Some estimates suggest that smaller investors have been pouring money into the stock market at a rate that is 10 times faster than at any point in recent history. That, when combined with what appears to be excessive valuation and expanded multiples in the market as a whole, presents a red flag for equity prices.
In addition, Europe is struggling, central banks are making moves to save already weak economic conditions from deteriorating further, and France, as an example, is teetering on rejecting the demands of the European Union by expanding their debt instead of managing it prudently.
Domestically, our economy has been living off of infuse capital, injected by the Federal Reserve to prevent deflation and prevent economic recession. They have done an excellent job in preventing these from coming, but according to our macro economic analysis our economy is in the third major down period in U.S. history, and unless they continue to stimulate forever we will eventually revert back to our natural economic conditions.
The tapering program that the Federal reserve is currently engaged in has already changed net real stimulus, when the operations of the U.S. treasury department are included, from what was positive to net negative real stimulus, so domestically economic troubles are also something that institutional investors recognize as a real possibility.
I have always said that bond market investors are much smarter than stock market investors, and if smaller investors are indeed pouring money into the market faster now than they have at any point since the credit crisis I see no reason to change my point of view. The bond market is much larger than the stock market, smart money investors have been pouring money into long-term U.S. treasury bonds even as the stock market presses all time highs, and my warning to everyone who is interested in shorting U.S. treasury bonds is that if the stock market falls from these lofty valuation levels even more money will flow naturally into the bond market and the bond market will almost surely continue to increase.
Persons interested in shorting the long-term U.S. Treasury bond should be careful.