Jonathan Hoenig: Take Bearish Positions on Short-Term Interest Rates Now

Friday, 01 Aug 2014 12:56 PM

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Jonathan Hoenig of Capitalistpig says now is the time to play defense in financial markets. He recommends placing long-term bets on rising short-term interest rates.

In an interview on Yahoo Finance, Hoenig said his favorite trades at the moment have nothing to do with stocks.

Editor’s Note: Retire 10 Years Earlier With These 4 Stocks

He noted yields on 2-year U.S. Treasurys have been up for months now. Betting on higher interest rates is a good bet in the current environment, according to his estimates.

“The yield on the 2-year, the shortest bond the government sells, is at a three-year high,” Hoenig said.

“If you’re looking for longer-term trades right now, betting on higher short-term interest rates should at least be on your list."

Shorting individual Treasurys is awkward for most retail investors, Hoenig noted.
He recommended two ways to play his trade, both of them exchange traded funds: the iPath US Treasury 2-year Bear ETN, with the ticker symbol DTUS, and the iPath US Treasury 5-year Bear ETN, ticker DFVS.

Meanwhile, Brad Lamensdorf, manager of the Ranger Equity Bear Fund ETF, ticker HDGE, told Yahoo he believes a 10 percent to 20 percent correction in stocks is already underway.

“A lot of correcting is starting. It’s just a matter of what it’s going to take to get everybody scared enough to form a bottom,” Lamensdorf said.

US News & World Report said being in long bonds can be perilous when interest rates go up.

The magazine noted longer-term bonds may be even riskier than short-term bonds.

US News suggested investors intent on buying bonds may want to consider buying individual high-quality bonds instead of bond funds, or laddering into bonds over a period of years, the equivalent of dollar-cost averaging in stocks.

“If one considers the portion of the portfolio allocated to bonds as the foundation of the portfolio, with the purpose of generating income and portfolio stability, a solidly constructed bond ladder brings peace of mind, no matter what interest rates are doing,” US News concluded.

Charles Plosser, the president of the Philadelphia Fed, is one of the hawks on the Federal Reserve’s Open Market Committee.

Plosser said in a statement Friday he believes the Fed is holding interest rates below levels that are appropriate to a growing economy, and thinks the central bank should tighten monetary policy accordingly, MarketWatch reported.

Editor’s Note: Retire 10 Years Earlier With These 4 Stocks

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