How To Be Bearish On Long-term Treasuries

The American bond market is one of the linchpins of the global financial system. Nevertheless, a growing concert of voices, including some extremely successful investors, is beginning to question the long-term stability of US debt instruments.

So how can investors be bearish on long-term treasuries? One way to bet against long-term treasuries is to buy an ETF that goes up when bond prices go down, such as the ProShares Short 20+ Year Treasury (TBF).

This fund and similar ones make it possible to bet against bonds in the long run. Should investors take a look at TBF today, and why are bonds starting to look riskier than they historically have been?

What Exactly Is TBF?

TBF is a fund that shorts Treasury bonds with maturation timelines of 20 years or more.

On any given day, the fund’s purpose is to return the exact inverse of the ICE US Treasury 20+ Year Bond Index.

In this way, investors who buy TBF can essentially bet against the performance of long-term US bonds, profiting if the value of the bonds decreases.

Why Would Investors Want to Short Long-term Bonds

At first glance, it may seem an odd choice to buy a fund meant to short long-term US Treasury bonds. After all, American bonds are usually seen as the gold standard of debt instruments and are held by many of the world’s largest financial institutions.

The idea, however, may not be as unusual as it first appears. Like any other financial instrument, bond prices fluctuate over time based on macroeconomic factors. As such, shorting bonds has the potential to deliver gains for investors when bond prices fall.

This typically happens in response to rising interest rates, due to the inverse correlation between bond prices and yields. Investors who see higher interest rates in the long run, therefore, may want to buy a fund like TBF to take advantage of what they see as the likelihood of lower bond prices.

Aside from the periodic fluctuations caused by interest rates, there may be even more fundamental reasons to short long-term bonds. This is because of America’s fast-growing national debt.

As of the time of this writing, America owes approximately $35.8 trillion. Thanks to this enormous debt load, the country spends about $2.4 billion each day on interest payments alone.

It’s generally assumed that America’s debt-to-GDP ratio can’t sustainably exceed 200 percent. At the moment, the number is closer to 120%, meaning that the US is likely still in the safe zone.

Current estimates suggest that American debt could reach a tipping point in about 20 years if current policies around spending and revenue remain in place.

Even before a debt crisis or default occurred, however, it’s likely that interest rates would have to rise in order for increasingly risky American bonds to retain their appeal to buyers.

This, in turn, would increase America’s debt service costs, further increasing the rate at which the country needed to borrow in order to maintain its spending levels. According to the Congressional Budget Office, rising debt and service costs could also begin to crowd out economic growth, potentially reducing the growth of tax revenues.

In the event of such a debt spiral, it seems to make sense to bet against long-term bonds. The bonds that make up the ICE index that TBF shorts mature in time periods where current policies would likely result in high interest rates and questionable bond market confidence. Both of these factors could cause bond prices to fall, thus producing gains for investors who shorted those bonds.

At least two major billionaire investors are currently known to be deeply bearish on long-term bonds. Stanley Druckenmiller is known to actively be shorting bonds, reflecting his view that inflation could re-emerge and soar to levels unseen for most of the last 50 years.

While this information is unverified, it’s currently believed that up to 20% of Druckenmiller’s portfolio could consist of bets against the bond market.

Paul Tudor Jones has also come out swinging against bonds. Jones is specifically betting against longer-term bonds on the view that spending and deficits will rise under either a future Donald Trump or Kamala Harris administration. Like Druckenmiller, Jones believes that inflation will continue to rise as America’s debts soar.

Is TBF a Buy Now?

Although there are some compelling arguments against long-term bonds, there are also some decent reasons against shorting them.

To begin with, the Federal Reserve is expected to keep cutting interest rates in the short run. By the end of next year, interest rates are expected to fall to about 3.5%.

Though it’s beginning to look a little uncertain whether the Fed will cut rates again in its upcoming meeting, the trend still seems to be toward lower rates. This will tend to push bond prices up, potentially saddling those who short bonds now with losses for an indeterminate period of time.

It’s also worth noting that the American economy has proven remarkably resilient to higher and higher debt loads over time. Though there’s clearly a point at which this will no longer be true, America has been taking on extra debt for decades without any significant ill effects.

Government could also eventually take action to reduce the debt, though doing so would likely require bipartisan cooperation that hasn’t been particularly common in recent years.

Finally, there could be problems with TBF itself when used as a long-term hedge against falling bond prices. As ProShares itself notes, volatility in the underlying index could cause returns generated by TBF to deviate from the goal of returning an exact inverse of the bond index.

Depending on volatility levels, the deviation could be significant over time. As such, a fund like TBF may or may not produce the desired returns if the bond market begins to encounter structural strains.

In conjunction, these factors could make TBF a risky or lackluster investment. Though billionaires like Tudor Jones and Druckenmiller have certainly beaten the market by being contrarians before, shorting bonds may not be the best choice for the average investor’s portfolio at the moment.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.