How To Invest Like Julian Robertson: Short Treasuries, Dummy


We’ve been talking about the dangers of inflation and possibly hyper inflation in the near future. Now the Market Folly blog has a long post on how Julian Robertson, the hedge fund legend behind Tiger management, is shorting Treasuries to profit from inflation.

“He takes a macro approach, finds a smart idea, researches it exhaustively, and places a big bet. And, when he feels he is more than correct, he will ‘bet the farm.’ And, it looks like we have identified Robertson’s next play where he has and will continue to ‘bet the farm,” Market Folly reports.

And Robertson is betting the farm on a decline in the prices of Treasuries. From Market Folly:

In layman’s terms, he is shorting long-term US Treasuries. Taken from eFinancialNews, “Steepeners are a type of interest rate swap, where one party agrees to pay the other a fixed rate in exchange for a floating rate, which is derived from the difference between long and short term rates. Many of these products also use high leverage, where the difference between the two rates is multiplied by up to 50 times to produce a higher return.”

Basically, Robertson has been buying puts on longer-term treasuries. He thinks rates could hit 7% easily and could go as high as 18%. We agree with him on this play and we first published our very basic rationale behind shorting US Treasuries back in October of last year. The main point we’re focused on is the wager that interest rates on Treasury bonds will rise. When the yields increase, bond prices will drop, thus benefiting the short position. Julian’s talked about this play in numerous forms, and we actually first heard about his ‘curve steepener’ play in January 2008 in Forbes. That piece highlighted how Robertson was “long the price of two-year Treasuries and short the price of the 10-year Treasury – betting that the difference, or curve, in the yield between the two will increase.” Such a play is negative on the US economy and Robertson executed it because he felt the Federal Reserve would continue to flood the economy with money. And, he was right.

Robertson ultimately feels that the US dollar will become so weak that it causes the central banks of China and Japan to stop purchasing Treasuries. As such, 10-year bond prices would move down and that’s exactly what we’ve seen play out.

How can ordinary investors short Treasuries to get in on this play? Market Folly goes through a couple of different investments that will allow investors to take part in the great inflation bet. The best tactic is probably the simplest: short Treasury Indexed ETFs. Ticker TLT is the iShares Barclays 20+ year treasury fund. Since its performance tracks long term Treasuries, shorting it allows investors to profit from any decline. (Note Market Folly warns that the double-short TBT might not be a good idea for anyone but day-traders since it resets daily and the performance over the long term doesn’t really match long term treasury performance.)

If you want to get even fancier, check out Market Folly’s write up of the “steepener” swaps that Robertson himself is investing in. One warning: Treasuries have already declined steeply. You might want to wait for a rally before putting this trade on at this point.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.