What if...those are two very important words in investing and seem to be in rare use these days. The "gubmit" is going to bail everyone out all the time, so just let it rip and go long, long, long. Anyone who has ever watched a Jerome Powell press conference would have a hard time disbelieving that sentiment, but there are still a few of us out there who actually believe in valuing companies, and in turn valuing stocks, and looking for undiscovered opportunities.
Sometimes being short when everyone seemingly is long is an opportunity, and that strategy paid big dividends in February and March of this year. In looking at the chart of the yield of the 10-year U.S. Treasury note, we see that the peak yield was reached in early November 2018 at 3.2%. Today the yield on the 10-year is 0.86%.
It is very important to note that the current pullback in yields began more than a year before Covid-19 was even a concept in anyone's mind. The year 2019 was a great one for those long Treasuries, and I believe that was Powell-driven. So, in truly typical fashion (no, I am not a fan of his, in case you hadn't figured it out) he and his buddy Steve Mnuchin decided to jawbone the hell out of the Treasury market AND to jawbone the FOMC into cutting the Fed Funds rate. Short rates affect long rates, and we saw that in action.
Powell and his FOMC cronies stated on December 20th -- this is a good summary of rate moves -- that the Fed was going to stop raising rates and then at the August 1st, 2019 FOMC meeting actually began cutting them. You remember August 2019, right? Large parts of the world economy were shut down while people were wearing masks and power-mad governors and mayors enforced ludicrous mandates. Oh, no, that's 2020. In August 2019, none of that had happened, no one had heard of Covid - it may have existed in some form then, but was not widespread - and the damn Fed was still cutting damn rates. As Steve Martin said in The Jerk, "I damn thee!"
Fast forward to 2020, and the Fed had fewer bullets than it should have to deal with a REAL emergency, but the firing of the ones that it had left over has once again made the stock market happy. But what if we have more lockdowns? In last week's RM column I named sectors to avoid and/or short if the world goes on lockdown again, but that was an article focused on equities.
If we are headed for hell in a handbasket again, real or imagined, you want to have exposure to lower U.S. Treasury rates. How to do that? Well, you could buy Treasuries, of course. Another way to gain bond market exposure is to use the leverage afforded by ETFs. ProShares' 2x leveraged ETF (UBT) gives exposure to the (ICE) U.S. Treasury 20+ Year Bond Index. If things start looking scary again, you want to have that.
I own some UBT and started buying just when so-called pundits were calling for a clear Biden-Democratic election sweep and a subsequent "back-up" in Treasury rates through 1%. Oops, didn't happen. I am damn glad I bought protection and, given the leverage inherent in its structure, UBT can be used offensively as well as defensively.
Unlike some frighteningly not so smart people who say frighteningly stupid things on national media outlets, I will not claim to be a public health expert, But I know that government bonds are the ultimate safety net for investors and that U.S. Treasuries are viewed -- this is as much a comment on the rest of the world as it is on the U.S.-- as best-in-breed in global government bonds. Buy some UBT. You will sleep better tonight after doing so.