We had Global Macro Investor‘s Raoul Pal on CNBC’s Fast Money last night. He detailed his generally gloomy outlook for the global economy and offered a fairly non-consensus view that the yield on the 10 year U.S. Treasury yield could get as low as 1/2 a percent in the next year (down from the current 2.09%) despite the fact that the U.S. Federal Reserve is out of the QE business and has recently ended ZIRP. Watch here:
His explanation for the 50 basis points possibility is nominal GDP and low inflation. If at some point in the next year the U.S heads into a recession, and we see no meaningful pick up in inflation then he sees a sub 1% yield on the 10 year, possibly as low as 50 bps (where most of the developed world is).
Taking a look of the 20 year Treasury etf, (TLT) it’s apparent that there is no greater safe haven trade than U.S. Treasuries. Look at the spike in late 2008 during our financial crisis, the spike in 2011 that led to higher highs in 2012 during Europe’s sovereign debt crisis and then again early last year when it became apparent that the global economic recovery from the depths of both crisis was fragile at best. That eventually succumbed by year end to the Fed’s official end of ZIRP in December:
What’s clear is that the TLT has been in a 10 year uptrend, making a series of higher highs and higher lows. And if Raoul Pal is correct (that the U.S. will head into a recession and the U.S. Fed will have to do a U-Turn on tightening and actually start easing again) then the trend is your friend.
Yesterday’s close, a penny below $125, was a 3 month high and at a key technical resistance level:
For a whole host of reasons options prices in TLT are cheap as chips. They just made a new 52 week low in December into the Fed’s first fed funds rate increase in 9 years. But implied volatility (at 14%) is well above the 2 year low at 9%:
Given the global equity volatility this year, if you were inclined to get more defensive amidst mounting headwinds to global growth and the potential that market participants start to shoot against the Fed’s current positioning, then long TLT makes sense. With the TLT at $125ish, the April 125 calls are offered at about $3.30, or about 2.5% of the underlying etf price.That’s not bad. But you might want to look to finance the purchase of long premium directional plays (despite cheap options prices). We will follow up with some trade ideas that look to minimize decay of cheap options.