iShares 20+ Year Treasury Bond ETF (TLT)

It's a great summer play and is now weakening. For the past year it's been consolidating. It could find support, but seasonablity works against it--bonds do well until October, then get out. Why? As on October, risk-on trade takes hold. With rising US rates and risk-on trade, he's no confident that TLT will get a big pop. He's not excited about this.

(A Top Pick July 10/17 Up 0.4%) He might have been a little late on acquiring this, he thinks. In 2008, when markets dropped over 40%, this went up 50%. This is the best hedge for the market out there. He does not own it now, instead he owns the 10 year bond equivalent. He expects he will get back into this in the next 12 months.

(Past Top Pick on June 15, 2017, Up 6%) He'd assumed interest rates would rise. They didn't. Rates rise and the value of TLT goes down. He sold a $126 call and he wanted it to close below that. It closed at $128 instead. He made 6% on the trade because he got more premium when he sold the option than when he would've had to buy it back on the last day of trading (last June).

All 3 of his top picks have an element of defensiveness to them. This is the Long Bond in the US and his favourite way to hedge against equity risks. This one is negatively correlated with equity markets. Because it is denominated in US$, Canadian investors have 2 opportunities to make money. 1.) If we see the markets tumble, he expects long dated treasuries to do well because it probably means rates are coming down and there is a flood to safety. 2.) The US$ being the world’s reserve currency, whenever there is uncertainty in the markets, people will flood to the US$ and US treasuries.

*Bear Call Spread* Thinks interest rates are going higher. If so, bond prices are going lower. This is the most liquid bond ETF in the US, and has very liquid options. He suggests the sale of December $126 Calls and Buying a December $133 Call. If the stock closes below $126 in December, both options will expire and you keep the net credit of about $2 a share.

There is a lot of volatility on these Puts, so you need to be aware of that, so they are not cheap. His inclination would be to do a Bear Call spread. This has a duration of about 14 or 15 right now, and if you get a 1% rise in rates, you will get a 15% drop in value of this, which would be good for the Puts. You need to recognize that the Puts are expensive for the amount of volatility that is inherent long-term on this product. If you are going to take a shot on it, he would Buy on the money, and probably 2 months out at best, mainly because they are expensive. Another way to do it would be to Sell a Call, and Buying a Call at a higher strike, just so you got limited risk. If the bonds go down or stay where they are, you get to keep the credit.

It is not a head and shoulders pattern. There is potentially a flag type of pattern. The high was mid Feb and there were lower highs in April and May. There are stable lows since then. He would be a buyer.

He likes this. He doesn’t mind being further out on the curve.

(A Top Pick April 30/15. Up 6.91%.) He still likes this. Thinks deflation is what Central Bankers are fighting deep down. He has a $167 target on this. He would add if it broke down below $160 on the 10-year.

(A Top Pick Feb 9/15. Up 1%.) Looking to buy more of this. Has a target of $149 for this in one year.

Bond ETF with a 15 year horizon? A bond should be part of a balanced portfolio and should not be particularly sensitive to a rising interest rate environment. He uses bonds tactically as a defensive allocation. This ETF is a good example. Treasuries have a “flight to safety” quality, so they tend to move oppositely to stocks. You do not want to hold this in a rising rate environment. For someone who is buying it for 15 years, stay in a “short duration”, possibly using iShares 7-10 Yr treasury bonds (IEF-N).

This holds long dated US treasuries. Top-quality and kind of boring. The $122 level is pretty interesting. It is right at the trend line. Moving averages are clustering around this level. He thinks this goes much, much higher.

This has done really well. Has been one of the most hated spaces of investing. Chart shows a nice long upward trend. If it broke below $125, he would re-evaluate this. Based on what the Fed is doing and some of the economic data that he is expecting to see come out in the next little while, we’ll probably see the US 10 year closer to 1% or below. If you are an asset allocator, you have to have long bonds. They did well last year.

He had really wanted to short this thing for the longest time. At some point the US bond market is going to be recognized as very overvalued.