Stanley Drunkenmiller, the legendary investor whose track record makes Warren Buffett's seem pedestrian, is on the record saying he is short US Treasuries (i.e. betting on higher interest rates). This announcement is quite incredible for two reasons. First, practically the totality of investors believe rates are headed lower. To take a position that rates are headed higher is as contrarian as one could be at the current time. Second, this is the man that "broke the bank of England". The infamous trade in 1992 that "broke the bank of England" is most often credited to George Soros but, in truth, it was Drunkenmiller's idea and trade. Soros merely convinced Drunkenmiller to triple the position before it turned profitable.
So when the guy who has made the most famous currency/interest rate trade of all time says he is taking a massively contrarian position in US Treasuries, it is probably worth taking into consideration. Maybe, it is even worth building a position alongside of him. The issue is how?
Welcome to our "Helping Hand Series" which will help explain how you, a Main Street investor, can obtain the same exposure as the big boys on Wall Street.
While articles on various news sites have quoted Drunkenmiller in saying he is short US Treasures, none of the articles I have found have provided any detail on how he has built his position. In fact, several of the articles overtly stated they have no knowledge of the duration or the means by which he is obtaining his short position.
Shorting US Treasuries directly can be problematic because not only does the short-seller have to pay margin interest on the loan to borrow the securities being sold short, further, a short position in an income-producing security also has to cover the income payments of the borrowed securities. So while I'm not privy to Drunkenmiller's book, I can assure you he is not short-selling US Treasuries directly but rather using derivatives to accomplish his short exposure.
Given his stature in the investment community, it's safe to assume he has many more options to short US Treasuries than we do. But that doesn't mean we can't build effective exposure as well. Buying Put options on various US Treasury ETFs would be one way to accomplish inverse exposure but given Drunkenmiller's ambiguous comments on timing, buying puts would not be advisable - at least if copying his exposure is your objective. Each of the articles I read said he wasn't sure if the trade would pay off in six months or six years. A put option expiring in six years would be prohibitively expensive if you could even find one that is trading. Conversely, a six-month put option may very well expire worthless.
In my estimation, the most efficient means of shorting US Treasuries would be interest rate futures. While futures do carry unique risks and an investor should thoroughly study the inherent risks to futures, the contracts are fairly straightforward. There are four durations of US Treasury futures, the 2 -year, the 5-year, the 10-year, and then the 30-year long-bond. Here are the tickers for each along with the notional value of each contract as of mid-day on October 30th.
Duration
2 Year
5 Year
10 Year
Long Bond
Full-Size contract
ZT
ZF
ZN
ZB
Notional Contract Value
$206k
$107k
$110k
$118k
If these contracts are too large and you would prefer to downsize your position, there is a micro contract on the 10-year, ticker MTN, which is 1/10th the size of the full-size contract.
I don't think I need to say it, but to short bonds is to bet on higher interest rates. This would be accomplished by selling, or "going short", the futures contract. In doing so, you would gain exposure that would likely profit if Drunkenmillers' trade turns profitable. For full disclosure's sake, anytime a person assumes a short position, technically, he or she is assuming a "risk with no end." I need to point this out but I truly do not see yields going inverted which would be required for US Treasury prices to climb an unlimited amount. But very strange things have happened in the capital markets thus one needs to thoroughly understand the risks of any trade before implementing it.