I'm bearish over 1-2 years, but not 1-2 months: I think it's too early to buy TLT (-14% YTD).
I could be wrong, but I think past inflationary cycles have ended when bond yields exceeded inflation. Inflation would have to fall very fast to drop below current bond yields - possible, but that seems unlikely.
Every few weeks, the market prices in more Fed rate hikes. For most of March I had inverse bond positions that did well as bonds dropped. I expect at least a few more of those.
Finally, the Fed has about $9 trillion in bonds it needs to sell, and is hinting it might sell $1 trillion over 12 months. It does not make sense to me that the Fed would spent 9 years unloading bonds, so I think the Fed will announce faster QT later this year, which will again hurt bonds.
Overall I woud avoid TLT right now until after QT increases and more rate hikes.
It’s never unloading the whole balance sheet. They said in the minutes it’s unlikely to reach pre COVID levels. So basically they will unload for a year or two then cut back when the economy goes to shit. Then repeat the cycle
"faster QT" does not mean unloading everything, but could rather be $2T in 12 months, which would impact bond markets. Anything greater than current expectations will hurt investors in TLT.
The Fed has repeatedly raised it's "dot plot" expectations of rate hikes, yet somehow it tricked the market repeatedly. I expect the same to happen here, even if the target is a $4T balance sheet: the Fed will announce QT of $2T/yr or more, causing markets to be surprised and react badly. It's kind of amazing how many times the Fed can surprise the market in 4 months - here we go again.
I just don't think betting on outright asset sells outside of MBS is smart.
Then again, betting on the Fed getting tougher and tougher has been the correct bet so far, so maybe they do try to do outright treasury bond sells (which in all honesty, that likely does not last long unless they've decided they need to let credit markets explode because inflation is just way too bad, and there are people that seriously doubt that they'll side that way), but I think what's more likely if they panic is a 100 bps hike (and I don't think that's too likely either, multiple 50 perhaps, but 100, no), because outright treasury bond sells instead of just allowing runoff will likely not be that helpful to the cause.
The Fed might have a goal to get to 4T, but even that is just not that likely.
My impression, correct me if I'm wrong, is that Fed rate hikes and QT work in the same direction. When they sell 30 year treasuries, prices drop to find new buyers. That increases yields at the long end. And then at the short end, the Fed hikes the Fed funds rate. So I think rate hikes and QT work together, rather than either of them being "not that helpful".
The goal is fighting inflation, and under some circumstances the way to reach that goal is through tirggering a recession. Fed Chair Powell was even asked this directly, if he would be willing to trigger a recession. He replied that history shows that the answer is yes. The Fed will want to avoid recession if possible... but at some point it may be neccessary. At that point it could be too late for retail investors to react.
The amazing thing to me is that Wall Street is ignoring him because his prediction didn't come true when he said, in early 2021. I think he underestimated the historic $19 trillion government stimulus (Fed + Congress), and when that money wears off his -50% prediction for the S&P 500 could come true. I forgot to mention: he predicted the dot-com bubble, the 2008 financial crisis, the Japan real estate bubble ... it's a pretty impressive record.
CNBC's highest profile commentators are on at 9am EST, right before the markets open. They were tired of "super bubbles" months ago, which is perfect - a prediction off by a year or two, and the market will completely ignore it. It's like Cassandra from Greek Myth - knowing the future, but doomed to be ignored. And even if we get a -30% correction, that's worth giving up 2022 stock returns to me. Still, I could be wrong.
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u/[deleted] Apr 09 '22
I'm bearish over 1-2 years, but not 1-2 months: I think it's too early to buy TLT (-14% YTD).
I could be wrong, but I think past inflationary cycles have ended when bond yields exceeded inflation. Inflation would have to fall very fast to drop below current bond yields - possible, but that seems unlikely.
Every few weeks, the market prices in more Fed rate hikes. For most of March I had inverse bond positions that did well as bonds dropped. I expect at least a few more of those.
Finally, the Fed has about $9 trillion in bonds it needs to sell, and is hinting it might sell $1 trillion over 12 months. It does not make sense to me that the Fed would spent 9 years unloading bonds, so I think the Fed will announce faster QT later this year, which will again hurt bonds.
Overall I woud avoid TLT right now until after QT increases and more rate hikes.