If I’m going to buy bonds, I’m going to buy the ones I think will go up the most.
At 37 years old, I think there’s a place for bonds in my long-term portfolio, just not a very big one...
It’s a small allocation, and I’m looking for the most juice I can get.
I am currently long high yield via EMHY and HYG, and this week I added another bond fund to the mix.
If you think bonds are ready to rip, and you want the most bang for your buck… You want the Zeros.
The Pimco 25-Year Zero Coupon Treasury Fund $ZROZ is the highest beta and longest duration of all the funds in our bond universe.
It’s the one with the most upside potential if yields come down… and right now, it’s rebounding off a historic support level at the 2010-2011 lows.
This is no minor polarity zone… We're talking about the same shelf that’s marked every major low in this vehicle since 2010. It’s where bottoms have formed in the past — and it’s where one might be forming again right now.
Back in 2011, ZROZ came off a double bottom formation and rallied almost 80% over the course of about seven months.
I love the prospect of generating a return like this while collecting an almost 5% yield.
And we have a similar double bottom shaping up today, which is why I’m thinking this way.
This is the moment of truth for duration, and I’m buying ZROZ against these old lows.
We’ve already written plenty on the three B’s––that’s Builders, Banks, and Bios––all rate-sensitive groups that we’re bullish on. Now I’m adding the purest of pureplays to our interest rate basket: zero-coupon bonds.
The current level becomes even more important when we look at the relationship between ZROZ and “traditional” Treasuries. Here’s the ratio of ZROZ/TLT sitting at a 15-year floor:
We’ve been here before. Every time this ratio turns higher, it coincides with a broad bond market rally.
This isn’t a prediction about the economy, or what Powell does next. It’s just supply and demand and good ol’ fashioned pattern analysis.
If duration is going to catch a bid, this is as logical a level as any for it to start. And ZROZ gives us a clean, asymmetric way to play it.
So, it’s really simple for me. I think rates are heading lower and bonds are heading higher… and I want the highest beta trade to take advantage of it.
There’s a time and a place for everything, and when it comes to bond funds, it’s the perfect time for ZROZ.
I’m in… and plan to stay in for the long run if we hold above 64.
We’re covering these asset classes regularly and sharing our top investing and trading ideas. It’s a great way to add uncorrelated exposure to a portfolio!
