February 20, 2014

Doug Kass: Short bonds trade of a decade

While the reward vs. risk of U.S. stocks might now be in equilibrium , the upside and downside for U.S. bonds are considerably different.

Even using my lower 2014 real GDP estimate of only about 2%, bonds appear to be a great short after the yield on the 10-year U.S. note has dropped by 40 basis points over the first five weeks of the year.

At a 2.6% yield now, bonds are now a short, and I have considerably added to my ProShares UltraShort 20+ Year Treasury (TBT) long in the last 24 hours.

The rule of thumb is that the 10-year U.S. note should yield roughly the nominal rate of U.S. GDP growth (real growth plus inflation).  With 2% real GDP growth (my estimate) and about 1.5% inflation, nominal growth should add up to about 3.5% this year, which is well above the current 10-year U.S. note yield of 2.6%.

If my economic forecast is too conservative (which is possible) and there is risk to the upside, the bond short should prove to be even more attractive as an investment short.

While in the initial stage of a rally in bond yields (and drop in bond prices), stocks will likely rally. As the yields rise further, stocks might face considerable competition from bonds.

For this reason and others, I prefer being short bonds over being long equities later this year.

I have characterized a bond short as the "trade of the decade" in the past.

We are now at an attractive entry point for the trade of the decade.

via http://www.thestreet.com/story/12321438/2/not-so-tweet-trade-of-the-decade-best-of-kass.html