Should You Make This “Easy Money” Trade?

Andy Snyder|March 22, 2021

There’s a huge “easy money” trade happening on Wall Street.

It’s the sort of no-brainer trade that hedge funds, pensions… and all the sophisticated investors have made in recent weeks.

They’re betting against Uncle Sam’s debt.

There are many reasons to think they’re right. Chief among them is $28 trillion in national debt.

But there’s also some $4 trillion worth of freshly printed dollars… free money in mailboxes all across America… as well as an economy with immense pent-up demand.

It doesn’t take a Wharton MBA to tell us Treasurys are overpriced and a rebound back to “normal” is likely.

In hindsight, the charts make the trade clear…

After dipping to an all-time low interest rate of 0.5%, the rate on the 10-year Treasury has been inching higher since.

It tells us – since price and rate move inversely – after soaring during last March’s meltdown, bond prices have been falling since July.

The folks who wisely shorted Uncle Sam’s debt when he was issuing so much of it last year have done quite well as rates return to pre-crisis levels.

But should you join the trade? Is it too late to make big money?

There are three reasons to be cautious…

We’ll cover each one – going from the simplest idea to the most complex.

Fighting the Giant

The first reason we don’t expect rates to go higher in the near term is the Federal Reserve tells us they won’t.

And while we’re only guessing… we bet the Fed has a bigger wallet than yours.

Like we said, it’s already printed trillions of dollars to get rates to this level. We reckon it has no problem printing some more.

Remember, the more the Fed prints, the more Treasurys it buys. And the more Treasurys it buys, the higher the price and the lower the rate.

As the saying goes, don’t fight the Fed.

Simply put… It’s a bear killer, and Treasurys have been in bear mode.

It won’t last.

Time for a Turnaround?

If that doesn’t scare you out of the trade, here’s another image that will. It shows that the so-called “return to normal” isn’t exactly good news.

The long-term interest-rate trend is quite clear…

Now, some folks say that this is the end of the nearly 40-year-old bull run for bonds. They have plenty of reasons to believe it (see those debt figures from above).

Then again, we’ve heard that refrain for, oh, say, the last 39 years.

Remember, this bull run won’t end until the Fed allows it to.

It’s not ready yet.

Someday not so far from now, it will be forced to let it die. The inflation that the Fed’s action will spark will force rational math back into the market.

But as Mr. Keynes tells us, the market can remain irrational longer than we can stay solvent.

Oh boy… can it.

Going Negative

And, finally, we come to the third – and most complex – piece of evidence that this bear in the Treasury market has come to an end.

It’s a signal from the repo market.

Earlier this month, the rate that banks charge each other for short-term loans went negative.

It’s a big deal… and like all useful news, it didn’t make it to The Today Show.

The repo trade is complex… but what’s happening tells us that, unlike “normal” times, it’s not cash that banks needed to get their hands on. There’s too much of that these days.

It’s Treasurys.

And they didn’t want them because they thought the price would go up.

No…

They wanted to borrow them… so they could bet against them.

It’s a short play – borrow at one price, give back at a lower one… and pocket the difference.

Remember, though, the repo market is a short-term market – with loans ranging from overnight to just a few weeks.

It tells us the big boys were looking to make quick in-and-out moves that have likely already matured. The fact that the repo rate is now climbing tells us that the trend is coming to an end.

Now that 10-year rates are essentially back to where they were before the shutdowns, it makes sense.

The fast-moving spike in interest rates is done… for now.

As these big funds unwind their trades, yields will be volatile. But the rising trend will come to a halt.

It’s good news for stocks and an economy addicted to cheap money.

But before you think we’re blind to the coming inflation and the painful bond rout that it will cause… we’re not.

Big trouble is brewing.

More on what that will look like and when it will come later in the week.

Be well,

Andy

Do you have questions on how the bond market and interest rates work? Send them to mailbag@manwardpress.com.