U.S. Treasury Bonds Are Doug Kass's Favorite Short For the Next Decade (Barron's Interview, 7/28/12)

Doug Kass, founder of hedge fund Seabreeze Partners, who I remember being a lone bear publicly on CNBC's Kudlow & Company back in late 2006 (along with Peter Schiff and Gary Shilling), mentioned his favorite short for the next decade in an interview with Barron's over the weekend: U.S. Treasury Bonds. I put up a 20 year chart of the 10-year Treasury Note Yield ($TNX) below to show the current trend.

"Finally, my favorite short of the next decade is the U.S. bond market, for those that possess deep enough pockets, have the fortitude and the patience. I am long ProShares UltraShort 20+ Year Treasury [TBT], which is the inverse, double-short bond ETF. Over the past 2½ years, bonds have achieved a near 60% total return. A remarkable feature is the consistency of positive returns and the absence of many drawdown years of consequence. Nevertheless, they should be viewed as a return-free asset class that is very risky. The 10-year yields under 1.5%, less than half the yield during the recessions in 2001 and 2008. That means I am paying over 65 times earnings for a 10-year-bond, a rich price even by Amazon's or LinkedIn's standards."

Read the rest here. It is interesting that Robert Prechter, of Elliott Wave International and a deflationist at the moment, also agrees that Treasury bonds are in the process of topping out, but based on credit risk, not inflation risk. Below is a 20 year chart of $TNX, the 10-year Treasury Note Index. The question is whether the the 10-year note yield bounces around between 1 and 2% or 2 and 3% for an extended period of time like the 10Y JGB. Japan's 10y note yield is around a 9-year low at 0.765%. Japan is still battling its secular deflationary environment and has a high debt/GDP ratio. From 5/22/12: JGB Watch: Fitch Downgrades Japan, Sees Debt/GDP at 239% in 2012 (10-year JGB Yield at 0.855%).

Source: StockCharts.com

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