TBT: Our Stock of the Week is NOT a Stock

Today’s stock of the week is…

[drumroll, please]

Not actually a stock!

Today is the Ides of March, also known as Julius Caesar’s least favorite day… so it’s a good day to deviate from our normal routine.

Instead of a stock, I will be highlighting an ETF – the ProShares UltraShort 20+ Year Treasuries ETF (TBT). Not only do I believe that TBT has significant upside, the forces driving it higher are some of the most consequential developments for the stock market and economy this year.

Essentially, TBT is a vehicle to make a leveraged, short bet on long-term Treasuries. This means that the price of the fund increases when Treasury yields rise and bond values go down. Over the past year, the 10-year yield has gone from a historic low of 0.5% to 1.62% today. And, the 30-year Treasury yield has increased from 1% to 2.4%.

Despite the gains already in hand, TBT still has more room to run as interest-rates remain undervalued relative to their long-term average of 4%, and there are several catalysts that should boost rates closer to that level this year and thus be a boon to TBT investors.

That is why TBT is my Stock Pick of the Week.

10 STOCKS TO SELL NOW!

Interest Rates Remain Depressed on Long-Term Timeframe

Long-term Treasury yields are driven primarily by two factors – economic growth and inflation. Thus, it makes sense that they bottomed out during the coronavirus crash in the Spring of last year. At this point, investors were piling into Treasuries as they were more concerned about return of capital rather than return on capital.

Despite recent strength in long-term rates, there’s still room to run higher as the long-term average for the 10-year Treasury is around 4%. Additionally, inflation has averaged between 2 and 3% annually, so anyone buying Treasuries at current levels would lose money on an inflation-adjusted basis.

Such behavior might make sense during a crisis, but it doesn’t make sense now when many analysts are forecasting second-half GDP to be in the +8% range. In this environment, investors will start intensely caring about return on capital. As a consequence, we will certainly see long-term rates move higher in time and a good chance they get back closer to the historical norm of 4% over the next few years.

Catalysts for Further Gains

The biggest reason to be bullish on TBT is that the economy is going to be quite strong the rest of the year and next year. Nearly, every major component of the economy is in expansion – housing, tech, government spending, manufacturing, etc.

Another massive jolt to long-term rates will be the economy reopening which seems likely in the Summer based on the current pace of vaccinations. This will unleash considerable pent-up demand which may be even larger with the newest round of stimulus payments hitting bank accounts this month.

Typically, such strong growth would be mitigated by the Fed hiking rates, and the government slowing spending, however due to the coronavirus, both entities are committed to continue supporting the economy with low rates.

As a result, GDP estimates are being ramped up. Today, Goldman Sachs hiked its 2021 GDP forecast to 8% from 5% late last year. If this forecast is correct, then long-term Treasury yields will continue moving higher.

In addition to growth, there’s reason to expect that inflation is also going to surprise to the upside. Economically sensitive commodities like copper and lumber are at multi-year highs. Oil prices are up more than 100% over the past year. There are reports of shortages and bottlenecks due to production being disrupted by the coronavirus, and demand being strong due to stimulus and pent-up demand.

Therefore, inflationary pressures are building. The recent PPI report came in at 2.8% which is the highest since October 2018. This report prompted the Fed to tighten policy with a rate hike in December, however this time, the Fed has signaled that it will tolerate higher levels of inflation to let the labor market heal.

Conclusion

As economic growth picks up and inflation increases, TBT will keep trending higher. Interest rates at current levels are an anomalous situation especially given the potent catalysts that are in the pipeline.

Another way to think about this is supply and demand. The supply of Treasuries is exploding with deficits of $3.2 trillion in 2020 and $2.7 trillion in 2021. Demand, for these conservative investments, will be lower especially as many assets will offer positive returns in an environment of strong economic growth. Investors will only be willing to buy these bonds at higher rates.

Truly this is one of the best risk-reward investments around as all economic indicators point to higher rates ahead. Plus the Fed has made it clear they are more concerned about a growing economy than inflation. So they will not tamp out the flames of inflation and higher rates any time soon making TBT such a logical choice for investors.

Discover More Picks Like TBT

TBT is just one of 11 stocks and 3 ETFs in my Reitmeister Total Return portfolio. That is where I put 40 years of investing experience to work for investors including:

Market Outlook
Timely Trading Strategy
Portfolio of Hand-Selected Stocks and ETFs

Note that year to date this portfolio generated a +22.12% return, well ahead of the +4.99% result for the S&P 500. Helping pave the way for those gains is innovative investments like TBT that the average investors is missing.

If you would like to see the current portfolio of 11 stocks and 3 ETFs, and be alerted to our next timely trades, then consider starting a 30 day trial by clicking the link below.

About Reitmeister Total Return newsletter & 30 Day Trial

TBT shares . Year-to-date, TBT has gained 30.76%, versus a 6.03% rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...