Short TLT as inflation hedge?

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Charles Anderson
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Short TLT as inflation hedge?

Post by Charles Anderson »

Hi, I see comments that suggest having a mortgage as an inflation hedge. I get it.

What do you think about this as a more liquid alternative? Since buying TLT is a bit like buying long-term Treasuries, then how about shorting TLT.

When inflation hits, long bond rates rise, so long bond prices fall - and TLT prices fall too.

Earlier 2021, TLT was around $157. Now around $137, because rates rose. A short would have gained $20.
Thx for your thoughts.
manuvns
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Re: Short TLT as inflation hedge?

Post by manuvns »

i don't short stuff as technically i can lose over 100%, also what if rates do not go up and instead went down?
Last edited by manuvns on Wed Apr 07, 2021 3:56 pm, edited 2 times in total.
000
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Re: Short TLT as inflation hedge?

Post by 000 »

What if the Fed prevents rates from rising?
luckyducky99
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Re: Short TLT as inflation hedge?

Post by luckyducky99 »

The market could go risk off and drive down yields for any number of reasons that are agnostic to inflation. So I don't think it's a good "inflation hedge".
MotoTrojan
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Re: Short TLT as inflation hedge?

Post by MotoTrojan »

Charles Anderson wrote: Wed Apr 07, 2021 3:07 pm
Earlier 2021, TLT was around $157. Now around $137, because rates rose. A short would have gained $20.
Thx for your thoughts.
Shorting isn't free, you have to pay a borrow rate. Fintel says that is currently 0.99% for TLT, not a bad rate, but for what you are getting it is pretty piss-poor.

Why not just invest in a TIPS fund, which will ensure you get a fixed real return (after CPI)?
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watchnerd
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Re: Short TLT as inflation hedge?

Post by watchnerd »

Charles Anderson wrote: Wed Apr 07, 2021 3:07 pm Hi, I see comments that suggest having a mortgage as an inflation hedge. I get it.

What do you think about this as a more liquid alternative? Since buying TLT is a bit like buying long-term Treasuries, then how about shorting TLT.

When inflation hits, long bond rates rise, so long bond prices fall - and TLT prices fall too.

Earlier 2021, TLT was around $157. Now around $137, because rates rose. A short would have gained $20.
Thx for your thoughts.
If you want to hedge inflation, whether shorting or buying, you should look at assets that actually correlate with inflation.

Nominal bonds have a low correlation to expected inflation, and a negative correlation to unexpected inflation.

TIPS are positively correlated with both expected and unexpected inflation.

Also, if you short TLT, you're taking on all sorts of other scenarios that can cause TLT to move that don't have anything to do with inflation.

What if rates rise without any big change in inflation at all?
Last edited by watchnerd on Wed Apr 07, 2021 5:38 pm, edited 1 time in total.
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Marseille07
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Re: Short TLT as inflation hedge?

Post by Marseille07 »

It's not a good idea. But if you must, go long TTT (inverse of TLT).
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watchnerd
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Re: Short TLT as inflation hedge?

Post by watchnerd »

Marseille07 wrote: Wed Apr 07, 2021 5:38 pm It's not a good idea. But if you must, go long TTT (inverse of TLT).
Or just go full crazy train and buy IVOL
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Topic Author
Charles Anderson
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Re: Short TLT as inflation hedge?

Post by Charles Anderson »

Thanks all for the helpful comments.
My understanding is that the Fed normally targets short rate. Whereas the long end is more moved by market forces, including long term inflationary expectations but also other factors.

Athough in e.g. 'Operation Twist' the Fed did intentionally move the long end so I get it. There is a precedent for long yields having moves that are not driven by inflation.

So TLT might not be as correlated with inflation as I might like. Same for real estate, stocks, commodities.. none really optimally correlated with inflation. I get it re TIPS and IBonds. Looking for additional ideas beyond those.

I don't really follow TLT disparagement, I must be missing something. I think TLT is not leveraged, its like a bond mutual fund but in etf form. Not 3:1. To me, if one is willing to own some 20+ year Tbonds, that's economically similar to being long TLT. Am I wrong?

Ok one can worry about Etfs in general (or mutual funds etc.), including TLT, but that's a much broader topic and not a reason to dislike TLT specifically, in my opinion.

Personally I'm not scared of shorts in a fund. I am scared of shorts in a single stock. I agree single stock shorts are usually far too risky.

Thx for TTT, but it's 3x. Not for me. I might look at TBF instead. However, short TLT is much more liquid than long TBF. I will think about that.
Marseille07
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Re: Short TLT as inflation hedge?

Post by Marseille07 »

Charles Anderson wrote: Wed Apr 07, 2021 8:55 pm Thanks all for the helpful comments.
My understanding is that the Fed normally targets short rate. Whereas the long end is more moved by market forces, including long term inflationary expectations but also other factors.

Athough in e.g. 'Operation Twist' the Fed did intentionally move the long end so I get it. There is a precedent for long yields having moves that are not driven by inflation.

So TLT might not be as correlated with inflation as I might like. Same for real estate, stocks, commodities.. none really optimally correlated with inflation. I get it re TIPS and IBonds. Looking for additional ideas beyond those.

I don't really follow TLT disparagement, I must be missing something. I think TLT is not leveraged, its like a bond mutual fund but in etf form. Not 3:1. To me, if one is willing to own some 20+ year Tbonds, that's economically similar to being long TLT. Am I wrong?

Ok one can worry about Etfs in general (or mutual funds etc.), including TLT, but that's a much broader topic and not a reason to dislike TLT specifically, in my opinion.

Personally I'm not scared of shorts in a fund. I am scared of shorts in a single stock. I agree single stock shorts are usually far too risky.

Thx for TTT, but it's 3x. Not for me. I might look at TBF instead. However, short TLT is much more liquid than long TBF. I will think about that.
My bad, yeah I meant TBF, not TTT. I went to look for inverse TLT and saw a wrong one.

As far as long TBF vs short TLT, always go long whenever possible. Doesn't make sense to take a short position when you don't have to. Let the ETF operators do the work for you to create a long inverse position.
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Re: Short TLT as inflation hedge?

Post by hi_there »

Hi, OP. What percentage of stocks is your portfolio? If you are already mostly invested in stocks, then you are already somewhat hedged against inflation. Shorting treasuries in ETF form is probably not a great idea, due to lack of efficiency and also the presumably undesirable exposure to changes in real interest rates. I would just make sure your portfolio is spread out in a good mix of domestic and international assets and call it a day.
luckyducky99
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Re: Short TLT as inflation hedge?

Post by luckyducky99 »

Charles Anderson wrote: Wed Apr 07, 2021 8:55 pm I get it re TIPS and IBonds. Looking for additional ideas beyond those.
There’s also LQDI. Basically investment grade corp bonds plus inflation swaps. Not sure I’d use it personally, or how, but it’s something.
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Beensabu
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Re: Short TLT as inflation hedge?

Post by Beensabu »

No. Nobody knows what's going to happen, which way it's going to go, when, or for how long. Just look at economist responses to the Fed minutes.

You can, and people have, really screwed themselves doing stuff like this. It's actual gambling, and you need super deep pockets to hold long enough to make it pay off even if you somehow end up being right.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."
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watchnerd
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Re: Short TLT as inflation hedge?

Post by watchnerd »

Charles Anderson wrote: Wed Apr 07, 2021 8:55 pm Thanks all for the helpful comments.
My understanding is that the Fed normally targets short rate. Whereas the long end is more moved by market forces, including long term inflationary expectations but also other factors.
Other factors can include fiscal policy, tax changes, stock market crashes / flight to safety, foreign interest rates, and capital / currency flows.

That's a whole bunch of complicating factors that mess things up if trying to specifically target inflation.

Vanguard themselves said that short TIPS track inflation better than longer ones because of "noise" in the long bond signal.
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learntoinvest123
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Re: Short TLT as inflation hedge?

Post by learntoinvest123 »

Shorting TLT is a great inflation hedge. Max loss will be 25% if 10 year touches 0.5% again. Gain will be 17% if 10 year touches 3% (similar to 2018).

To make any money, you will need inflation to show up in CPI and PCE over couple of quarters.
If inflation does not show up or is moderate, this will rise and stay there locking up capital. So it is exactly that... a hedge.

If decent inflation shows up in CPI and PCE, even straight up shorting stocks will also work as a hedge. Last time when Fed pushed rates to 2%, stocks fell 20%, so that would be a more profitable hedge albeit with more risk.

I do like the TLT hedge better, stocks could continue to rise with moderate inflation, TLT will fall. I don't like TBF long, it is bad inverse of TLT, lot of tracking error.

Thanks for the idea. I will put this on my watch list. Maybe a 10 year yield pull back would be a good time to put in a trade.
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watchnerd
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Re: Short TLT as inflation hedge?

Post by watchnerd »

learntoinvest123 wrote: Wed Apr 07, 2021 11:23 pm Shorting TLT is a great inflation hedge. Max loss will be 25% if 10 year touches 0.5% again. Gain will be 17% if 10 year touches 3% (similar to 2018).
Why are you referring to 10 YR when TLT duration is double that?
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