Doug Kass: Shorting Treasurys Remains ‘Trade of Decade’

Tuesday, 02 Oct 2012 08:21 AM

By Dan Weil

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Hedge fund manager Doug Kass disagrees with the notion that the Federal Reserve’s latest round of quantitative easing (QE) will spark a rally for Treasurys.

“I maintain the view that shorting the U.S. fixed-income market is still the trade of the decade,” he writes on Real Money Pro.

The 10-year Treasury yield stood at 1.62 percent Monday, down from 1.77 percent Sept. 13, the day before the Fed announced QE3.

Editor's Note:
 
The Truth About the Economy — Government Documents Lead to Eerie Conclusion

Kass, president of Seabreeze Partners, acknowledges the slowdown of U.S. and foreign economies, not to mention the looming fiscal cliff. But he stills sees Treasury yields rising, for several reasons.

First, “QE3 is designed to attack private-sector mortgage-backed securities yields,” he writes. “It is not directly targeting public sector Treasury yields.”

Second, the Fed has purchased $1 trillion of Treasurys with maturities of five years or longer since 2009. If the Fed drops Operation Twist at year-end, “the Fed will no longer be the dominant, incremental buyer of Treasurys,” Kass says.

“What class of buyer will pick up the slack?”

In addition, China, the largest foreign holder of Treasurys, will probably cut back purchases amid its own economic weakness.

Kass isn’t the only investment luminary who’s bearish on Treasurys. Bill Gross of Pimco and Jeff Gundlach of DoubleLine Capital feel the same way.

It’s hard to argue with them. If the economy recovers, interest rates will rise. And even if it doesn’t, rates are close to zero already.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

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