30 year treasuries are now yielding 3.3%, the only “recent” time they yielded less was in the end 2008 / begin 2009 when they yielded a few days under 2.85%, due mainly to safe haven panic buying, and only in the 1950s can you find a lower yield for a short amount of time. This means they are priced for deflation, recession, zero or negative growth, and additionally that they are priced out of fear and safe haven buying, I’m betting that the latter is the biggest factor. My view on shorting treasuries has not changed since I wrote on it back in June, the only difference is that now the risk reward is much better. You can find the yield for all us government bonds for every single day since 1990 here. You can also find a follow up to this post commenting about operation twist.
This week I shorted 2 more TLT in the money calls (strike 95 october). Now I have the equivalent of 300 TLT ETFs short, equivalent to 36000 dollars short. As I mentioned before, I plan to keep on rolling them indefinitely. In case of deflation they could cause temporary paper losses, which would not be necessarily bad because it would mean that I could short more and that the amount of cash I have would be worth even more and by then stocks would probably be very cheap giving a good buying opportunity. On the other hand, most probably as I see it, the huge amount of dollars printed and even a slow recovery will generate inflation or a slight increase in interest rates will make those treasuries tank generating a nice profit. Or, as many fear, all this government debt and massive printing will cause runaway inflation in which case the short profits could be VERY nice. I’m OK with any possible outcome I would have a permanent loss only deflation stayed for longer than I would be able to keep the short, for example if deflation stays for 5 or 10 years and I would have to cover the short because I needed the money, if not, I can wait, indefinitely, eventually they will most probably fall.
On the company front I am currently focusing on Banks, specifically on Banco Santander Brazil as a possible buy and Wells Fargo to see if I should increase positions. Wells Fargo has been dragged down by problems in the banking sector being sued in the USA, Bank of America’s troubles and European Banks exposure to sovereign debt. All those problems affect Wells Fargo much less than its peers, nonetheless it has been penalized for being a bank, no wonder why Warren Buffett added to it on the 8th August (market low), nobody yet knows how much he added, but from what he said, he added more stocks on that single day than during the whole year. That day Wells Fargo was as cheap as today.
Also this week I sold my 5 Banco Santander strike 8 calls, they had much more time value than when I bought them and only offered protection until mid September, which I do not think is necessary anymore, I therefore replaced them by the equivalent 500 stocks, due to the captured time value holding the options was much more profitable than holding the stocks plus it protected against a collapse of a big magnitude, which did not happen but was big enough to boost the time value. I also sold my strike 10 September USG call on the pull back to 10, before its time value went to zero, I do not mind taking a loss there because having the call instead of the equivalent stocks allowed me to add USG under 8 which should play out nicely on the long run.