Friday, December 16, 2011

Are Treasury bonds a crowded long?

How crowded is the long Treasury trade? Anecdotal evidence suggests that the trade is becoming a crowded long. Ed Yardeni recently wrote:
Last week in Kansas City, one of our long-only accounts was especially concerned that the Endgame scenario is upon us. We discussed the best way to preserve capital in such a calamitous environment. The conclusion was to load up on the US dollar and US Treasury bonds, the scenario that seems to be working so far this week.

What does the data show?
Let's go to the data. Global Macro Monitor showed this chart of who is funding the US deficit. While the latest data shows that there are certain a lot of fund flows into US Treasuries from domestic and international investors, levels are similar to levels seen in 1Q 2010 and below the panic levels seen in the 3Q and 4Q of 2008.

What about hedge funds? These charts from Mary Ann Bartels of BoA/Merrill Lynch shows that large speculators, or hedge funds, are nowhere near a crowded long in the long bond.

What about the 10-year note? This chart shows that while large speculators have been buying the 10-year note, they are also nowhere near a crowded long.

This chart below shows the relative performance of the 30-year Treasury ETF against SPY. Again, it shows that while long bond returns are somewhat stretched relative to equities, relative performance levels are similar to the levels seen during the Summer of 2010 and far below the end-of-the-world levels of the Lehman Crisis.

Conclusion: While investors may be rushing into US Treasuries, the safety trade is nowhere near a crowded long, which indicates that risk-off trade has more room run.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


walt said...

Good work, Cam. Zero Hedge couldn't have done better.

GGrewal said...

I understand that your timing model is using the US Long Bond (eg. TLT) when the model signals deflation.

You mention in this post that TLT is not a crowded trade yet and has room to run. That may be the case in the short-run however, the thing I'm worried about is the credit risk lurking in these bonds waiting to detonate. The question is how long we can keep relying on TLT during periods of crises? Any thoughts?

Do you suggest any alternatives to the US Long Bond during deflation? What about using Investment Grade Corporate Bonds (LQD)?

MMT enthusiast said...

There is no credit risk with TLT. 100% of the holdings are in US treasuries. As long as the US government issues its own fiat currency and its debt is denominated in said currency then the US can always meet its liabilities. Stated otherwise the US can never run out of dollars because they are the sole, legal, creator of dollars. Contrast that with Europe who is a currency user. European countries can default on their liabilities because they do not issue Euros but the ECB does.