Some thoughts on shorting long term treasuries via the TLT etf

I have been short for an average of 7 or 8 months on treasuries via the TLT etf. What I have done meanwhile is sell out of the money puts with early strike dates on my short positions, that has at least paid for most of the dividends I had to pay for being short. I did that mostly every time that the TLT fell, like that they paid more and I reduced the risk of giving up gains on my short positions if the TLT fell. I have also sold very far away out of the money covered puts, strike 90, that has been a very good trade, which I already closed, but it was profitable because the TLT remained high for so long and because I sold them when the TLT had temporary fallen to the 110 area and when the market volatility was very high.

Another similar alternative is selling deep in the money calls like that you do not pay the dividends and you pay much less in margin fees because your short positions are much smaller. The problem is that those short calls can not have a too low strike price otherwise they get, for sure, called away on the ex-dividend date so you end up paying the dividend anyways. To get around that you can sell calls that are closer to the current TLT value but then you run the risk of giving up all the gains when the TLT falls below the strike, and it has proved that when treasuries fall they fall fast so that risk is really worth considering. So nothing is easy !

Add to that the hardest part: it’s also not easy to short the TLT because it’s manipulated by the government, by politicians, by the FED, so you are betting against them if they want, like now, to keep interest rates low. I think 30 and 10 year treasuries are ridiculously low and if they were naturally priced by the market and not by the FED they would fall. So TLT has the potential of crushing and falling hard if you believe, like I do, that market forces are stronger than governments and that at the end inflation could creep in hard due to the constant interventionism, the high level of government debt, which could be inflated away, and the money dilution caused by large sums of printed money. But I might be wrong absolutely or in timing and interest rates could stay low for a very long time. On the other hand you can also have a change of policy from one day to the other, a change that would reduce quantitative easing intervention number X by the FED buying government debt and let interest rates run at least more freely. In such case you would be benefited by the subsequent raise in interests.

In conclusion I think that the risk of losing a lot at current levels is low, that interest rates are at a minimum due to interventionism that is more likely to disappear than remain for ever. To lose you would need to have lower long term interest rates which would be hard and risky to justify even by the fed given they they are already at a muti-decade low and negative in inflation adjusted terms. Meanwhile I can hold on the shorts by selling opportunistically covered puts, like I have been doing, or maybe even adding more shorts when I feel that the TLT is too high. Doing that I am able to hold my shorts for a long time. It has been hard to do and it has required constant monitoring, and I think that picking undervalued stocks is easier for me, that’s why I focus more on that. Then again good undervalued stocks are also not that easy to find, so when you do find them it’s worth putting some decent money into them. I think that with TLT I will not lose but I will only gain a decent amount in case of rising interest rates, which is also not sure. So actually what it does in practical terms is to act like a hedge against higher interest rates or inflation. I probably will not earn much nor lose, but if interest rates rise some day I certainly will make some decent money.

Cheers!
jrv

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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5 Responses to Some thoughts on shorting long term treasuries via the TLT etf

  1. Aly says:

    Thanks for all your articles.

    Any thoughts on CHK? I know there’s a CEO ‘scandal’ but neither the asset value nor the value of future earnings of the company have changed over last few months in a material way. Even at these low natural gas prices, CHK is still able to make significant amounts of money and has the ability to lock-in prices (and thereby profit) if it wants to, right now, to secure profits. It may decide to do that but I’m not surprised it’s choosing to stay unhedged right now, as it will probably benefit from this decision if natural gas prices recover anytime within next couple of years.

    Put premiums seem ridiculously high. Even a $12.50 Jan 2013 put is yielding over 15% annualized, for example.

    thanks again and cheers

  2. Pingback: Reason why I pass on Chesapeake energy | The Intelligent Investor Blog

  3. cma6 says:

    jrv,
    Re your purchasing of AMAT, have you done an analysis on it on your blog?

  4. jrv says:

    Hi cma6, I have not done it on the blog, it’s all in my had for the time being.

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