A Trade in Treasury Bonds : TLT

Three months ago, I showed you one of the hardest trades to make in the market… It was a bullish bet on U.S. government bonds. And it did not go over well with readers (including J.D., who wrote the note above).

Even if you agreed with J.D. and skipped the trade, it's important to understand why it was so unpopular, why I recommended it anyway… and why I think it's working now.

There's a timeless lesson here. And you should remember it next time you recoil at a trading idea…

In May, I suggested Growth Stock Wire readers consider a trade on the iShares 20+ Year Treasury Bond Fund (TLT).

Treasurys are essentially loans to the U.S. government. Their prices rise and fall according to how eager folks are to lend their money to Uncle Sam. If folks are eager, they'll accept lower interest rates. Lower interest rates mean higher prices for Treasurys.

For every 1% increase in long-dated Treasury prices, TLT rises 1%.

So if you bought TLT, you were making a bet that folks would be willing to accept lower interest rates to lend money to the U.S. government for decades.

For most readers, that's a hard trade to make…

You've seen the proof that U.S. government finances are a mess. You've heard the arguments that we're undermining the dollar's unique status as the world's reserve currency with toxic amounts of debt. You know it's not going to end well.

But often, when everyone is convinced that something is going to happen, it's a good idea to bet on the opposite happening. It's a good idea to make the hard trade.

A "hard trade" is a trade that goes against your instincts. It goes against the consensus belief. It's a trade you don't want to tell your friends about because they'll tell you what a fool you are.

To the majority of people, a bullish bet on Treasurys was a preposterous idea. It was a deeply "anti-consensus" trade. But as currency analyst John Percival warned investors in his book The Way of the Dollar, "Never forget that the consensus usually includes you."

And our "anti-consensus" trade… our "hard trade"… has been the right trade…

As you can see in the chart below, TLT has built on the uptrend it began at the start of the year. It just broke out to a new 52-week high.



Over the last three months, the yield on 30-year Treasurys is down from 3.49% to 3.20%. And TLT is up 7.2%, including interest. (My DailyWealth Trader readers are up 15.8% on this idea with UBT, a double-long Treasury fund.)

I don't expect this trend to continue forever. I expect the U.S. government's financial problems to come home to roost at some point. I expect long-term interest rates to rise and long-dated Treasury prices to fall. I expect that to be a painful transition for America.

But I have no idea when that's going to happen. And in the meantime, yields could continue to drop and TLT could continue to climb. In 2012, 30-year Treasury yields hit 2.46% – their lowest level in more than 50 years. At the time, TLT traded just over $132, about 12% higher than today's price.

If you made this trade, congratulations.

The crowd is still against you. The trend is still in your favor. And the hard trade is working. Please share this article