The Real Bubble Trade – How to Make Money From the Sovereign Bond Market Collapse – The new BIG SHORT?



Government Bonds, Debt & Interest Rates

A lot of people are claiming that stocks are in the biggest bubble ever…could be the case. I do agree on that fact that stocks are not cheap (P/E, P/CF) but the problem is there’s still no real alternative….invest in cash or bonds. Both categories do not deliver the yield that equities do. So yes, stocks could be expensive from a fundamental point of view, but from a relative point of view, it’s in my opinion still the best alternative compared to government bonds. The latter, Government Bonds, and with that, record low (artificial) interest rates, is in my view the REAL BUBBLE and a once in a lifetime opportunity to play the next BIG SHORT. (The Big Short is referring to the traders that shorted the MBS/CDO market at the top of the Real Estate Market, great movie, must see and experience the lunacy for yourself ;).

The year I was born, interest rates were at 10-12% and since then, interest rates have declined in a steady downtrend, even turning negative (2Y yield Germany -0.66%). How on earth is it possible to charge negative interest rates? And we all act as if it’s (the new) normal. I can tell you this, it ain’t normal, this is lunacy, pure madness and a sign the system is out of control.

Add to that one that the amount of debt, since the last crisis of 2008, has increased by trillions.

Two ingredients, mixed in a cocktail, waiting for a disaster to unfold.

Imagine what will happen to the financial system, and the value of assets and derivatives that are pegged to interest rates, once interest rates start to normalize. Countries, governments and sovereign entities are at the brink of bankruptcy…it’s just a matter of time before rising rates will pull the rug from under this great experiment.

In the end, it will all revert to the mean.

Click here for the latest updates of the Real Bubble Trade, here for My Total Portfolio and here Why Stock Markets Will Double 

Dashboard Interest Rates

Once the sovereign bond market collapses, bonds will see an outflow and equities an inflow. That’s the reason why I expect Higher Highs for stocks for the next couple of years: flight out of public assets and into private assets. I’m short bonds for the long term, anticipating rising interest rates. 

The Dashboard consists of (clockwise, start left top corner): 2y German yield, 10y German yield, 10y Spanish yield, 10y French yield, MSCI world vs TNX, 10y US Treasury yield, 10y Italian yield and left bottom corner is 10y Portuguese yield. Click on the image to enlarge.


Interest Rates Italy

Below is the Weekly Chart of the 10 year Italian Government Bonds, currently at an interest rate of close to 2%. So let me get this straight…2% annual return for a ten year loan to a country that is close to bankruptcy. Something about Risk vs Reward?

What we’re seeing in the chart is a downtrend, declining interest rates since 2013 (actually interest rates have been declining since the 1980’s when rates were near 10-12%) but the interesting thing is that the RSI is forming Higher Lows and Higher Highs (Bullish Divergence). Bullish Divergence often leads to an increase in value of the underlying product (in this case, interest rates up means bond value down, that’s why I short bonds).

I would prefer one more dip to the blue ellipse, after which European interest rates are likely to go through the roof and the next crisis is born.



Interest Rates USA – How Low Can You Go?

The weekly chart of 10 year Treasury Note shows a steady declining trend (rates down), same as in Europe. Also, the RSI is showing Bullish Divergence in progress. The interesting thing is that the pattern of Lower Lows stopped mid 2016, when it formed a Double Bootom at 1.38% (for now). A double bottom (or Higher Low) is the first sign of a change in trend. Of course, that also emphasizes the relevance of the 1.38%. For my case to hold, the 1.38% key level should not break to the downside, because that means a continuation of the pattern of Lower Lows.

Key Levels to Trade for the Long Term: 1.38% to the downside and 3% to the upside. 

In my view, it’s only a matter of time before rates start to normalize and the financial system as we know it, will collapse. This will lead, in my view, to an outflow of Sovereign Bonds (Public Assets) and an inflow into Private Assets (such as precious metals and equities).


How I Play this new BIG SHORT

At the moment, I have 3% of my assets invested in products that deliver a positive return if interest rates go up.

I will add to these, and similar products: 1. at the end of every month and 2. when interest rates have dropped to the blue ellipse that I pointed out in the charts above.

Two of the products that I invest in to hedge against rising interest rates are:


DB X-Trackers Short IBOXX Sovereign Eurozone

The iBoxx® EUR Sovereigns Eurozone Short index tracks the inverse performance of the iBoxx® EUR Sovereigns Eurozone index on a daily basis. The iBoxx® EUR Sovereigns Eurozone index tracks all Euro denominated government bonds issued by eurozone governments.

Lyxor ETF SGI Daily Double Short Bund

The SGI Bund-Future Short Leverage index tracks the two times leveraged inverse performance of the SGI Bund-Future index. The SGI Bund-Future index tracks the Euro-Bund future. The Euro-Bund future is a synthetic 10 year bond issued by the German government.

Over the next couple of weeks, I will search for more alternatives to profit from a collapse of the Sovereign Bond Market. If you have a good investment product that will benefit from the coming collapse in Sovereign Bonds, then feel free to let me know!

I’m prepared for the next crisis (see My Total Portfolio)

Are you? 


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