My worst call over the past year at Seeking Alpha was a recommend long position in TBF captured in my previous article titled "TBF: Profiting from Inflation." It also happened to be my first article. Unfortunately there was no inflation to profit from, and subsequently bond yields went even lower. Amazingly, some investors are now willing to lend money to the US Government for 20 years at approximately 2.5%. I’m not one of them.
There is no shame in being wrong, but there is shame in staying wrong. When a security goes against you, you have two options; either take the value investor’s approach of doubling down or the technician’s approach of cutting losses. There is no silver bullet for outperforming the market; thus rather than committing to either approach, I use whichever I deem appropriate for the situation. Given the performance of TBF, now is as good a time as any to reassess the situation.
Beginning this process, it’s vital to recognize the unique times we find ourselves in with regards to interest rates. Below is a chart looking at 3-month Treasury bills from the 1930s to 2011:
We have come full circle. The symmetric nature of the chart is interesting, as minus a few anomalies it is a remarkably similar pre- and post-1980. Also of note, the length of time interest rates were at 0% in the 1930s and 40s, it turns out to be a period of close to 20 years.
TBF shorts 20 year + bonds, therefore this historic look at short-term rates misses part of the picture. Unfortunately, the Federal Reserve website doesn’t provide 20-year rates going back that far. I was able to find rates going back to 1962, which when graphed look as follows:
Again, we are at 50 year lows, and given that the yield curve is usually in contango, I expect the 20 year government bond yield over a longer time frame will mimic the 3 month T-bill rates closely.
With this historical perspective in mind, rates have little room to go lower. Theoretically speaking, negative interest rates are possible, but I doubt that will come to fruition. The real issue is how long it will take for rates to rise again, as if 0% short-term yields persist for 10 years and TBF stays in the $30 range, there are clearly better opportunities for your capital. Broadly speaking, what will ultimately determine if rates mimic the great depression will be the health of the economy, and the health of the economy will be determined by jobs.
Despite all the fearmongering in the press and the internet enabling lunatics of all types to propagate their conspiracy theories, the US is nowhere near facing the challenges that were faced in the 1930s from a jobs perspective. The Dallas Fed report has a chart that does an excellent job of highlighting this:
Based on this, even with this president’s disastrous policies and worse rhetoric, I’m optimistic the US economy will persevere and the trend of better job numbers will continue. If one of the two parties in the US takes a cue from Hong Kong’s economic policies, which is where I currently reside, or from Singapore, where I resided last year, and promotes economic freedom rather than inhibits it, capital will flow out of long term government bonds even faster, raising yields and with it the stock price of TBF.
In closing, in this situation, I’m taking a cue from the value investor playbook and doubling down. I liked it at $45; I love it at $32. Over the coming years, I see TBF being an excellent opportunity for the retail investor to capitalize on the coming sell-off of US bonds.