U.S. stocks soared to record highs after Donald Trump’s election win and a quarter-point rate cut from the Federal Reserve. U.S. government bond yields have surged too, puzzling many market participants. I am going to stick with the contrarian view and bet on rates continuing to move higher. I’ll express that through a bearish bet on the iShares 20+ Year Treasury Bond ETF (TLT) which tracks bond prices. (If rates rise, the ETF’s value will decrease since bond prices and yields move inversely to each other.) TLT 3M mountain iShares 20+ Year Treasury Bond ETF (TLT), 3 months Prior to the September half-point rate cut, market expectations were for the benchmark 10-year note’s yield to go down, not up. Various inputs have driven yields higher, creating the opposite outcome for the Fed as they continue to try to land the proverbial plane. US10Y 3M mountain U.S. 10-year Treasury yield, 3 months The government’s 2024 budget deficit (nearly $2 trillion) and the annual cost of government debt service vaulted over $1 trillion (for the first time ever) in order to finance the cost on our gigantic U.S. debt of $36 trillion. The looming and growing fiscal situation has been a catalyst for bond investors to push yields higher as they demand more reward (higher yielding bonds) knowing the massive amount of government issued supply headed down the pipeline. The 10-year note is up roughly 60 basis points on this notion since September’s initial significant rate cut. (1 basis point equals 0.01%.) Jeffrey Gundlach stated (post Fed meeting) that interest rates could shoot even higher if Republicans end up controlling the House too. Fed Chairman Jerome Powell has attributed the recent rise in yields to stronger growth and not a potential reacceleration in inflation, nor the fact that debt service on our massive debt has gone up over 300%. The trade Long and short here, bond vigilantes are looking to push the 10-year yield up and above 5%, that should make TLT move lower. I want to define my risk in this trade and own a put spread to capture this potential downside move in the long end of the Treasury curve. The TLT portfolio’s effective duration is 16.5 years creating additional sensitivity to the long end. Bought the 1/17/2025 TLT $92 put for $2.60 Sold the 1/17/2025 TLT $88 put for $1.10 Costing an investor $1.50 or $150 per spread This spread was executed when TLT was roughly trading $92. DISCLOSURES: (Long TLT put spread.) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
