Thread
2/ “I thought you were a crypto trader, why are you talking about #bonds?”
First, please understand my core thesis.
#Crypto follows #macro and trades more like a tech stock.
In other words, it’s currently highly correlated to the #stock market, only with more volatility.
First, please understand my core thesis.
#Crypto follows #macro and trades more like a tech stock.
In other words, it’s currently highly correlated to the #stock market, only with more volatility.
3/ Therefore, my first priority is to understand the world, and then I believe I’ll understand #crypto.
So first #bonds, then we’ll get back to crypto. Promise!
Also, for more on my macro thesis, check out this read:
So first #bonds, then we’ll get back to crypto. Promise!
Also, for more on my macro thesis, check out this read:
4/ Now I recently published a video called ‘Bonds are Dead.’
www.youtube.com/watch?v=t4A2aiB5bZM
It’s true, but there’s ONE more bond trade of a lifetime to happen first.
Here’s what is happening right now, and how I believe it all plays out.
www.youtube.com/watch?v=t4A2aiB5bZM
It’s true, but there’s ONE more bond trade of a lifetime to happen first.
Here’s what is happening right now, and how I believe it all plays out.
5/ Bonds 101
Government bonds are simply debt that’s issued to support government spending.
In exchange for buying the debt, market participants like you and me receive a return.
Government bonds are simply debt that’s issued to support government spending.
In exchange for buying the debt, market participants like you and me receive a return.
6/ Bond Returns
Bond yields vary based on the rate that they pay. Interest rates are set by the Federal Reserve.
These interest rates change over time, thereby impacting bond returns.
Bond yields vary based on the rate that they pay. Interest rates are set by the Federal Reserve.
These interest rates change over time, thereby impacting bond returns.
7/ Where Are We Now?
Current 10 year bond yields are roughly 3%.
They have risen dramatically relative to the May 2020 lows during Covid.
Current 10 year bond yields are roughly 3%.
They have risen dramatically relative to the May 2020 lows during Covid.
8/ Why?
Bond yields have risen as the FED has raised interest rates, thereby raising the cost of borrowing. Investors benefit w/ higher returns.
Existing bond values have an inverse relationship w/ rates.
As interest rates rise, existing bond values decrease, and vise versa.
Bond yields have risen as the FED has raised interest rates, thereby raising the cost of borrowing. Investors benefit w/ higher returns.
Existing bond values have an inverse relationship w/ rates.
As interest rates rise, existing bond values decrease, and vise versa.
9/ What Happens Next?
As I’ve predicted, I believe the FED is going to pivot. This means they will at first go neutral (keep interest rates the same), but eventually cut interest rates and turn on the money printer once more.
When this happens, bond yields will decrease.
As I’ve predicted, I believe the FED is going to pivot. This means they will at first go neutral (keep interest rates the same), but eventually cut interest rates and turn on the money printer once more.
When this happens, bond yields will decrease.
10/ Why FED Pivot
I can’t go into all the details here, but check out this popular thread I wrote recently called ‘This Decade in Macro’ which lays out my big picture view on what’s happening right now.
I can’t go into all the details here, but check out this popular thread I wrote recently called ‘This Decade in Macro’ which lays out my big picture view on what’s happening right now.
11/ Why Bonds Will Appreciate
When bond yields decrease (ex, from 3% to 1%), that makes the previously issued bonds at 3% worth a lot more.
For investors to get those better yielding bonds, they must pay a higher price. The only way to buy them is on the market. Price go up!
When bond yields decrease (ex, from 3% to 1%), that makes the previously issued bonds at 3% worth a lot more.
For investors to get those better yielding bonds, they must pay a higher price. The only way to buy them is on the market. Price go up!
12/ Like This Thread?
I write a curated newsletter with my thoughts on #crypto #bitcoin and markets to simplify the space for anyone to understand.
Subscribe here: alectorelli.substack.com
Also, follow @AlecTorelli on twitter for daily posts!
I write a curated newsletter with my thoughts on #crypto #bitcoin and markets to simplify the space for anyone to understand.
Subscribe here: alectorelli.substack.com
Also, follow @AlecTorelli on twitter for daily posts!
13/ The Bond Trade
If one believes in this thesis, the simple trade is to buy TLT. I’d avoid options since volatility is high and they charge a premium.
Plus, one has to time it correctly.
If one believes in this thesis, the simple trade is to buy TLT. I’d avoid options since volatility is high and they charge a premium.
Plus, one has to time it correctly.
14/ Risk-Reward
I can’t say for certain what the upside is, but I’m estimating somewhere in the 20-30% range if this plays out like I described.
As for timing, it will probably take a year.
I can’t say for certain what the upside is, but I’m estimating somewhere in the 20-30% range if this plays out like I described.
As for timing, it will probably take a year.
15/ How Certain Am I?
I’m 70% certain this plays out. If the FED doesn’t pivot, all bets are off. Be sure to understand the cause and effect relationships and first principles behind this trade.
Also, this is not financial advice, but opinion for educational purposes only.
I’m 70% certain this plays out. If the FED doesn’t pivot, all bets are off. Be sure to understand the cause and effect relationships and first principles behind this trade.
Also, this is not financial advice, but opinion for educational purposes only.
16/ How I’m Playing It
I’m NOT betting on the bond trade. I’m an asymmetric investor, & although there is some asymmetry here (upside 3-4x downside), the returns aren’t compelling enough.
Plus, I’d have to lock up lots of capital for a yr to let to make meaningful returns.
I’m NOT betting on the bond trade. I’m an asymmetric investor, & although there is some asymmetry here (upside 3-4x downside), the returns aren’t compelling enough.
Plus, I’d have to lock up lots of capital for a yr to let to make meaningful returns.
17/ No Trade. Why Thread?
I like being right more than I like making money, so I enjoy putting the pieces together and documenting my thoughts to see if I will be historically correct.
Plus, I hope this helped you, whose investment strategy may be more fitting for this trade.
I like being right more than I like making money, so I enjoy putting the pieces together and documenting my thoughts to see if I will be historically correct.
Plus, I hope this helped you, whose investment strategy may be more fitting for this trade.
18/ #Bonds and #Crypto
As discussed, it’s all connected.
Crypto responds to macro. If the FED pivots and resumes the money printer, one can’t help but think this will be bullish for risk-on assets.
As discussed, it’s all connected.
Crypto responds to macro. If the FED pivots and resumes the money printer, one can’t help but think this will be bullish for risk-on assets.
19/ Since equities are 90% correlated with FED policy, and #crypto is correlated with #equities, it stands to reason that crypto would benefit if this all plays out.
More about this relationship in this 3 min explainer. www.youtube.com/watch?v=g1oAr4ZYZv4
More about this relationship in this 3 min explainer. www.youtube.com/watch?v=g1oAr4ZYZv4
20/ Next Up
I’ll keep you up to date with how I’m playing the markets and crypto in future posts. Follow @AlecTorelli for updates.
If you found this helpful, please like/share the original post. It’s my signal to keep producing more content like this:
I’ll keep you up to date with how I’m playing the markets and crypto in future posts. Follow @AlecTorelli for updates.
If you found this helpful, please like/share the original post. It’s my signal to keep producing more content like this:
21/ Your Turn
What are your thoughts on the bond market?
How do you see this playing out?
I know many of you are super sharp, and I’m always looking to learn from your wisdom.
Drop your $0.02 in a comment. GL out there!
What are your thoughts on the bond market?
How do you see this playing out?
I know many of you are super sharp, and I’m always looking to learn from your wisdom.
Drop your $0.02 in a comment. GL out there!
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Raoul Pal @RaoulPal
·
Aug 2, 2022
Great thread.