DOUG KASS: Shorting Bonds Is Still The Trade Of The Decade

doug kass

Photo: CNBC

Treasury yields are near all-time lows, and the Federal Reserve continues to reiterate its commitment to keep rates low for a long time.However, Doug Kass of Seabreeze Partners remains convinced that rates will soon rise, which means bond prices will fall.

“I maintain the view that shorting the U.S. fixed-income market is still the trade of the decade,” writes Kass in a new post for RealMoneyPro.

“And, despite the known headwinds of slowing domestic and non-U.S. economic growth and the threat of the fiscal cliff, I now believe that the potential exists for bonds to experience pricing pressure (and an increase in bond yields) over the near term. “

He provides eight reasons for his ongoing bearish call on Treasuries.  Here are three big ones:

  • QE3 is designed to target mortgages, not Treasuries.
  • If the Fed doesn’t extend Operation Twist at the end of the year, there will be extra slack in the Treasury market.
  • China is slowing and is less likely to be a big buyer of U.S. Treasuries.

This is a position he discussed at great length in a big presentation at May’s Value Investing Conference in Omaha, Nebraska.  According to Market Folly, Kass identified seven key factors that could be “disruptive to the bond market”: 1) “the flight to safety premium erodes;” 2) “a muddle through economy might gain speed in the years ahead as domestic growth moves toward potential;” 3) “Federal Reserve policy is likely on hold—natural price discovery in fixed income;” 4) “inflation on the ascent;” 5) “housing is embarking on a durable multi-year recovery;” 6) “stocks versus bonds—the approaching reallocation trade;” and 7) “U.S. fiscal imbalances are not being addressed.”

In a series of charts and data tables, he demonstrates how these factors create a huge opportunity for investors willing to go against the grain.

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