Paul Tudor Jones Is Betting Big Against the Bond Market: How You Can Too.

Stan Druckenmiller and Paul Tudor Jones, both among the most successful traders ever, are now on the same side of a trade: shorting long-duration bonds.

This move is more than just a hedge but rather it’s a bet that interest rates are headed higher, and when these legendary traders make such strong statements, retail investors would be wise to take notice.

For those who want to follow their lead, the ProShares Short 20+ Year Treasury ETF (TBF) offers a convenient way to short long-term Treasuries without the complexities of futures or options.

But why exactly are they betting against bonds, and what does it mean for you?

Key Points

• Stan Druckenmiller and Paul Tudor Jones are shorting long-duration bonds, expecting higher interest rates to drive prices down due to inflation pressures.
• Retail investors can use the TBF ETF to profit from falling long-term Treasury prices without the complexity of shorting bonds.
• Quantitative tightening and increased bond issuance could push long-duration bond prices lower, making TBF a strong potential play.

Why Short Long-Duration Bonds?

The rationale behind Druckenmiller and Jones’ bearish stance on long-duration bonds is centered around one key concept: interest rates and inflation.

Long-term Treasuries are particularly sensitive to interest rate changes, as their fixed interest payments become less attractive when rates rise. This leads to a drop in bond prices, particularly for those with long maturities like the 20-year and 30-year bonds.

In simpler terms, when inflation expectations rise or when the Federal Reserve hikes rates, the price of long-duration bonds plummets.

The ProShares Short 20+ Year Treasury ETF (TBF) provides an inverse performance to long-term Treasuries, meaning that when the price of these bonds drops, TBF goes up.

Over the past 18 months, the Federal Reserve has raised interest rates from near zero to over 5.25%, one of the most aggressive tightening cycles in modern history.

This has already put tremendous downward pressure on long-term bond prices, and with Druckenmiller and Jones expecting further rate increases, or more specifically sustained higher rates, the downside potential for bonds is high.

What’s Happening to Bonds?

The iShares 20+ Year Treasury Bond ETF (TLT), which tracks long-term U.S. government bonds, has lost over 45% of its value since August 2020, a staggering decline for an asset class traditionally seen as “safe.”

Investors who bought bonds at their peak in the summer of 2020, when yields were near historic lows, have seen their portfolios decimated as yields surged past 4.5% for 10-year Treasuries and over 5% for 30-year Treasuries in 2023.

Long-duration bonds are particularly sensitive to rate hikes. For every 1% increase in interest rates, the price of a 20-year bond can drop by as much as 20% due to a metric called duration, which measures the bond’s sensitivity to interest rate changes.

With inflation still well above the Fed’s 2% target and the possibility of “higher-for-longer” interest rates, Druckenmiller and Jones see the bond market’s woes as far from over.

Investors Are Underestimating Downside of Bonds

Most retail investors are drawn to bonds for stability and income, but the dangers of long-duration Treasuries in a rising rate environment are often underestimated.

One reason Druckenmiller and Jones have taken a short position is the extreme duration risk in the current market. The average duration of a 20-year Treasury bond is around 17 years, which means a 1% increase in rates can lead to nearly a 17% price decline.

Additionally, quantitative tightening, where the Federal Reserve reduces its balance sheet by selling bonds, adds further selling pressure to the bond market. This dynamic, combined with government deficits requiring substantial new bond issuance, creates a supply glut, putting even more pressure on long-duration bonds.

Why TBF Makes Sense for Retail Traders

TBF is designed to move inversely to the daily performance of the ICE U.S. Treasury 20+ Year Bond Index, meaning that when long-duration bonds fall, TBF rises. Over the past year, TBF has gained roughly 25%, mirroring the steep declines in long-term bonds.

With an expense ratio of 0.95%, TBF isn’t cheap, but for investors looking to capitalize on the bond market’s continued struggles, it offers a convenient, liquid option to participate in the trade without the complexities of shorting individual bonds or buying derivatives.

Catalysts for Further Declines in Bonds

Several factors could drive bond prices lower from here. First, if inflation proves more persistent than expected, the Federal Reserve may need to keep rates elevated for longer or even raise them further.

Second, ongoing fiscal deficits are forcing the U.S. Treasury to issue more bonds, increasing supply and driving down prices.

Lastly, the Fed’s balance sheet reduction through QT will continue to remove liquidity from the bond market, creating more downward pressure on prices.

Economists at Goldman Sachs have pointed out that, due to the sheer volume of bonds issued, long-term Treasuries are particularly vulnerable to these supply-and-demand imbalances. This is why Druckenmiller and Jones have placed such a strong emphasis on shorting long bonds—it’s a bet not just on higher rates, but on a fundamental supply-demand mismatch that could last for years.

Potential Returns and Strategy

For retail investors, the math is simple: as long as rates remain elevated or continue to rise, the price of long-term Treasuries is likely to decline. With TBF, investors can capitalize from this decline without needing to engage in more complex or risky strategies like options or futures trading.

The key, however, will be timing. Bond markets are notoriously volatile, and any indication that the Federal Reserve is nearing the end of its tightening cycle could spark a sharp rally in bond prices, leading to short-term losses for TBF holders.

Time to Join Stan and Paul?

Stan Druckenmiller and Paul Tudor Jones’ decision to short long-duration bonds is a strong signal that trouble could be brewing in the bond market for years to come.

For the ordinary investor, TBF provides an accessible way to mirror this bet, offering the potential for significant gains as long-term Treasury prices decline further.