I think this is an incredibly important week for Treasuries.
I’ve talked about the “Flippening” before here on InvestorPlace, which is the transition back to long-duration Treasuries as the quintessential flight-to-safety trade. I’ve noted continuously that all the narratives around Treasuries are wrong, as we need to see credit spreads widen for Treasuries to act as a hedge. That appears to finally be happening.
I’ve also repeatedly talked about the four main ways of playing “risk-off.” Those four are the utilities sector (which is starting to show signs of life on a relative basis), the dollar (the clearest winner), gold (coming from behind), and Treasuries themselves.
Everyone has abandoned Treasuries as the choice for a flight-to-safety sequence except for me. After a brutal last several years, I think the time has finally come for Treasuries to shine.
Yes, utility stocks, gold, and the U.S. dollar can continue to outperform, but the convexity potential in long-duration Treasuries is very real if Phase 2 of the credit event – which will occur in corporate debt — is indeed underway as I suspect it is.
Admittedly, I have been wrong regarding the timing of when Treasuries would counter. On Sept. 25 I made the dramatic post on X that “the end of the world is at hand” which is why Treasuries this time around would work as a counter to stocks. It’s a play on when I argued the same for stocks two weeks before the October low in equities in 2022. This time around I think I was a month early in the argument, but I have never been more confident in that thinking than now.
https://twitter.com/leadlagreport/status/1716456977440596035
Get Ready for the Short Squeeze in Treasuries
Given short positioning in Treasuries and investor sentiment, I maintain there can be one of the most incredible short squeezes in history in long-duration Treasuries, and that that occurs by sacrificing stocks and corporate junk debt. The flight-to-safety trade into Treasuries is, was, and always will be about the market assigning increased default risk.
https://twitter.com/leadlagreport/status/1602280315745181696
To be clear, I have no view on Treasuries longer term. This is about the trade to hedge against widening credit spreads and as such, a counter to stock market volatility. It’s not my opinion. I have consistently showed data proving that. And while most people are unable to zoom out to periods outside the small sample they live in (including to the pre-1980s period for Treasuries), the truth is undeniable. And if today marks the return of the flight-to-safety trade, I told you so.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com
