Another excellent post, thanks Russell - agree with everything you say and still see downside to TLT, albeit after a bounce from these levels.
Want to caution though that with TLT (or any other passive ETF for that matter) the short interest and other positioning metrics ideally need to look through to that of the underlying assets, that either form the baskets or are used by dealers to hedge - for TLT that's 20+year maturity treasuries and US Ultra Long bond futures... hard to get data on the former but for the latter CFTC data is available and shows a massive amount of short interest by speculators (CTAs and other funds).
Q is this something you have looked at and monitor also Russell?
Definitely seems retail short and buying the dip, though seems speculators may have woken up and now taking the other side - interestingly Ackman just announced he'd covered his 30yr bond short...
Bloomberg has some data on bond positioning, but have found it hard to reconcile. Dealer positioning tends to be an amagalmation of lots of different things…
Technically I get Ackman covering TLT - but as mentioned elsewhere, reshorting a position is very difficult. I prefer to let it run if I can
"If we see a reduction in shares outstanding in TLT or a rise in short interest, a tactical cover may make sense."
Please assume I am a novice. I don't understand this statement. I thought a rise in short interest should be a good news for short-sellers. Why would you go for a tactical cover in this scenario?
When you short sell a share you need to borrow it from a long term holder. That long term holder cannot sell until you return the borrowed share. So when you.get a rise in short selling liquidity disappears and big counter trend move become possible. See AMC or GME
Thanks! Got ya! My understanding is that a reduction in shares outstanding happens when a company buys back shares. I assume same would happen in case of an ETF such as TLT. My understanding is that for ETFs, whenever a new unit is sold, new units of underlying assets are bought by the fund. So for TLT, new long-term treasury is bought to create new units of TLT? Is my understanding correct?
ETFs create and destroy units in line with demand (unless they are closed end - then the ETF can trade at a premium or discount to underlying). If people want TLT, then units will be created and the manager will buy more treasuries. The manager acts purely on demand from client - there is no active decision to buy or sell treasuries.
Are you any closer to start your own fund / ETF / investment club, so one can execute these ideas via your vehicle. Thanks looking forward to your affirmative reply.
I took myself out of the Short TLT trade took it from 122 to 84.50 but finding it hard to get motivated to re-enter now even though I see the logic of rates getting above Fed Funds Rate.
Another excellent post, thanks Russell - agree with everything you say and still see downside to TLT, albeit after a bounce from these levels.
Want to caution though that with TLT (or any other passive ETF for that matter) the short interest and other positioning metrics ideally need to look through to that of the underlying assets, that either form the baskets or are used by dealers to hedge - for TLT that's 20+year maturity treasuries and US Ultra Long bond futures... hard to get data on the former but for the latter CFTC data is available and shows a massive amount of short interest by speculators (CTAs and other funds).
Q is this something you have looked at and monitor also Russell?
Definitely seems retail short and buying the dip, though seems speculators may have woken up and now taking the other side - interestingly Ackman just announced he'd covered his 30yr bond short...
Bloomberg has some data on bond positioning, but have found it hard to reconcile. Dealer positioning tends to be an amagalmation of lots of different things…
Technically I get Ackman covering TLT - but as mentioned elsewhere, reshorting a position is very difficult. I prefer to let it run if I can
Worth looking at the shares outstanding of TBF (inverse 20yr etf) as well.
I agree rates need to take a breather soon - they've gone up so fast the last couple months. The 10 year caught quite the bid right when it hit 5%...
Interestingly enough, it looks like TBF has had mostly consistent outflows since the beginning of 2022.
Market cap is tiny....
"If we see a reduction in shares outstanding in TLT or a rise in short interest, a tactical cover may make sense."
Please assume I am a novice. I don't understand this statement. I thought a rise in short interest should be a good news for short-sellers. Why would you go for a tactical cover in this scenario?
When you short sell a share you need to borrow it from a long term holder. That long term holder cannot sell until you return the borrowed share. So when you.get a rise in short selling liquidity disappears and big counter trend move become possible. See AMC or GME
Thanks! Got ya! My understanding is that a reduction in shares outstanding happens when a company buys back shares. I assume same would happen in case of an ETF such as TLT. My understanding is that for ETFs, whenever a new unit is sold, new units of underlying assets are bought by the fund. So for TLT, new long-term treasury is bought to create new units of TLT? Is my understanding correct?
ETFs create and destroy units in line with demand (unless they are closed end - then the ETF can trade at a premium or discount to underlying). If people want TLT, then units will be created and the manager will buy more treasuries. The manager acts purely on demand from client - there is no active decision to buy or sell treasuries.
Thanks for the explanation.
Hi Russell,
Are you any closer to start your own fund / ETF / investment club, so one can execute these ideas via your vehicle. Thanks looking forward to your affirmative reply.
I should do a model portfolio soon for paying subs…
What I was wondering is whether shorting HYG dominates long TLT.
If oil is down and TLT is up, there would be an unwind of the short TLT long HYG trade. HYG down.
If oil is up and TLT is down, HYG would still be down due to the oil shock, recession and worse financial conditions.
Hyg could be a better short here.... but my guess is TLT still drives the fixed.income bear market
Here are my thoughts about TLT. What do you think?
https://econdef.substack.com/p/tlt-vs-oil-vs-junk-bonds
Preview makes sense... but you could do food instead of oil?!? Cash still yields more than TLT...
I took myself out of the Short TLT trade took it from 122 to 84.50 but finding it hard to get motivated to re-enter now even though I see the logic of rates getting above Fed Funds Rate.
Might have to let this pitch pass by.
Always hard to re-enter a short…. Why I try and be patient as possible
Well I started back in April 2022 - I’m patient but that’s capital tied up for 1.5 years albeit one of the best trades of that period.
Fair enough... but best trades tend to carry on for years. And short treasuries has that vibe
Who knows I might get another bite 👍