Marketfield Fund Manager Betting on Bear Market in Government
Earlier this month, we spoke with investors who are avoiding long-term U.S. Treasury bonds. Now we have come across one fund manager who is actually shorting Treasuries – basically, betting they will fall in price – and taking advantage of what he terms is the coming “bear market in government.”
Michael Aronstein is president and portfolio manager of the Marketfield Fund (MFADX), a $4.4 billion mutual fund that returned just over 13 percent in 2012 and 8 percent annually since inception in 2008. Aronstein wants investors to realize governments haven’t cut their debt the way American households have.
And government bond issuers with impaired balance sheets and the weakest underlying fundamentals have fallen first. Greece, Detroit, Egypt, and other government creditors are harbingers of a more widespread problem in the U.S. sovereign debt, Aronstein writes in his latest client letter.
As a result, his Marketfield Fund has “established meaningful short positions in long-duration government bonds during the past six months in response to this risk.” No one knows exactly when, but credit demand in the private sector will begin to crowd out government borrowing and prompt a rise in interest rates, he believes.
Marketfield CEO Michael Shaoul, in an interview, said any retail investor can copy this trade of shorting Treasury bonds, or betting the price will go down. The most popular route is via an exchange-traded fund called iShares Barclays 20+ Year Treasury Bond Fund (TLT). By “shorting” the fund, investors can take the position in their portfolio that U.S. long-term Treasuries will drop in value.
There are more aggressive and much riskier ETFs, such as ProShares UltraShort 20+ Year Treasury (TBT), which uses borrowed money to double up on the same bet. The fund seeks investment results that correspond to twice (200 percent) the inverse, or opposite, return of the daily performance of the Barclays Capital US 20+ Year Treasury Bond Index.
“We started shorting Treasuries in mid-2012, and it’s been comfortable short. It hasn’t put us under any pressure,” Shaoul said. The U.S. business climate is improving, and therefore the biggest risk for Treasury holders “is things going right [with the economy], not wrong,” he claimed.
Investors would likely then flee Treasuries, pushing the bond prices down. “Global economic data could very well surprise to the upside, the bond market misbehaves and overwhelms the Federal Reserve,” Shaoul explained. “The fact that they are targeting inflation and unemployment is very peculiar, and they have been wrong since 2009.”
Sophisticated investors can also buy put options on Treasuries – also wagers that the prices will go down.
From a timing perspective, the danger point for credit markets could be close at hand. Housing activity continues to accelerate, business investment is turning up, the U.S. government is resisting expenditure cuts and the Federal Reserve is continuing with policies that seem appropriate for the summer of 1932, Aronstein contended.
“The only mechanism that might change cavalier attitudes toward spending is the bond market,” Aronstein said. “If government remains on its current heading, fiscal discipline is going to be imposed rather than chosen. When we reach that stage, the volatility now associated with equities may migrate to fixed income markets.”
Marketfield Fund holds plenty of equities as well. Its top holdings as of Dec. 31, 2012, included BASF of Germany, iShares Dow Jones Transportation Average ETF, SPDR S&P Regional Banking ETF, iShares MSCI Mexico Index Fund, Eagle Materials and USG Corp.