My last financial post on 25 March Connecting the Dots could have been construed as a timing call, which wouldn’t be too far off base. As for myself, I’m over 26% YTD, but that post then (as clearly stated) was not to be considered financial advice then, and what follows is not to be considered similarly now; but, I had a thought. What if there was a sure thing, a low-risk strategy to at least not lose money, and at best, make money in these uncertain times.
Firstly, in the spirit of Euclid, let’s gather some knowns, or at least almost knowns, perhaps, most likely knowns. We can grade these 1-3, with 1 being true, and 3 being less than true. Additionally, let’s gather some information supporting certain assumptions.
- Par value of bonds are inversely correlated to interest rate (1) : When interest rate go up, bond value goes down, and vice versa.
- The Federal Reserve only directly controls the short end of the yield curve (2): When the Central Bank “cuts/raises” rates, that is the overnight rate between banks lend to each other. This is most acutely felt on short-term US Treasuries.
- BIL=SPDR 1-3mo T-bill ETF: Current yield=4.59%
- ZROZ=PIMCO 25+Yr US Treas ETF: Current yield=4.85%
- Historically, when the Fed cuts rates, rates fall across the board (3), until now. Why?
- Current US federal debt=36.2T (1)
- 2025 US federal deficit=1.36T (1)
- Current projections are that the federal deficit will increase (2)
- Foreign creditors (Japan, China, UK biggest) are decreasing their positions of US debt, collectively, while their central banks are increasing position in gold. (2)
- US credit downgraded in 2011 (S&P), in 2023 (Fitch), and in 5/2025 (Moody). (1)
- The Fed cut interest rates x3 in 2024. (1)
- Value of BIL one year ago (20240613)=91.57 (All=1)
- Value of BIL today (20250613)=91.58
- Value of ZROZ one year ago=77.96
- Value of ZROZ today=64.96 (-17%)
- If you sell an asset at a loss, say ZROZ in the above example, you lose 17% value. (1)
- If you hold a losing asset, the loss remains an unrealized loss “on paper.” (1)
In the above, a logical assumption would be that there is a loss of faith in the long-term solvency of US debt, which makes further acquisition riskier and thereby demands a higher rate. Additionally, a net decrease in US debt increases supply, thereby decreasing demand.
Whereas short-term (ST) debt (BIL) has maintained value, while paying 4.59% interest, long-term (LT) debt (ZROZ) has lost 17% of value while paying 4.85% in the past year. So, in the case of ZROZ you realize a net income of 4.85-17%= (-12.5%), which is a very bad deal.
In light of the above, who would own LT debt? An idiot, that’s who, which is why there are a lot of bond bears; but, keep reading…
What does Bond King, Jeffrey Gundlach say? Last week, he said “A reckoning is coming.” It’s only 27 minutes, and JG is a personable guy; but, the most important thing I took from it was:
- The Fed will not accept 10-Yr rates above 5% (A different source, not JG, suggests a trigger of 6%); and the Fed will institute QE (buying LT Treasuries with helicopter money).
- LT Treasuries will become desirable right at that moment. Preferably, the day before, JG qualified with a chuckle, like, that’s impossible. Or is it?
More Knowns (per ChatGPT):
- For every 0.5% increase in LT (10yr) interest rate, ZROZ value will decrease by 12.5%.
- The inverse is true as well, for every 0.5% decrease, value will increase by 12.5%.
Key Takeaways: summary of QE effects on LT rates.
- Immediate market response to QE announcements usually caused sharp short-term drops in long-term rates.
- Magnitude of impact ranged from 0.5% to 1.0% lower yields during initial QE phases.
- Tapering or unwinding QE (e.g., 2013 and 2022–2023) often caused more dramatic rate increases than QE lowered them.
QE works partly by signaling future Fed policy and shaping expectations more than just by bond supply/demand.
So, it is not a given that LT rates will drop with QE, but BOND KING JG seems to believe that since the goal of this round of QE is to drive down LT rates to refinance US debt, it will most likely happen. The sharpest drop historically was after QE1, a 1.7T of funny money. This round would be considered QE1, and most likely in line with QE1 last time, plus the Fed will make it large enough to have the desired effect long enough to refinance the debt they want to.
In 2008, with the Fed rate cut, ZROZ increased about 50%, and during the covid swoon/spending, it increased about 40%.
Therefore, it is most likely JG is right, and owning LT US debt the day before would be a good thing.
So…Finally. The sure thing, or as sure as you could be, if this were actually investment advice, which it isn’t.
Let’s say you were stupid and bought LT treasury ETFs like EDV or ZROZ, or 10-20yr TLT. Let’s say you were convinced that rates would fall with the fed cuts, like they have forever, and you load up on EDV to be a hero and walk off into the sunset fat, happy and rich; but then the unthinkable happened. Rates on the long end went up. I mean, WTF? What now?
There are three possibilities, going forward:
- Trump and Bessent are right. GDP exceeds 3%, more DOGE cuts, and deficit decreases.
- They are wrong, tariffs suck, deficit increases, 10-yr rates exceed 5%.
- The US defaults.
The most likely outcome is #2. It’d be great if it were #1. In either of those cases, the long-end rates fall because US debt becomes less risky, or because the Fed decreases the supply (by buying massive amounts), and EDV/ZROZ take off like a rocket.
The last possibility will eventually happen, but not at this time. Funny money will work until it doesn’t, but that’s at least a few years off.
So, getting back to our stupid investor friend of a friend sitting on a shitload of LT ETFs at a 20% loss. WTF?
The long end will fall. It has to because of #1 or #2. It might be three months or three years, but the long end will come down whether market-driven or forced, and the value of EDV/ZROZ will increase significantly (20-60% from the lows). And the Bond King will be a buyer, or will have (most likely) already bought, because he’s the king.
Our stupid investor is no king, so what’s the best he (not saying it’s a he) could theoretically do? (Since this is not advice)
Sell all current LT US debt ETFs, and immediately buy a similar ETF, but dissimilar enough to trigger a wash sale. EDV/ZROZ is a good swap-pair as duration is slightly different.
This locks in paper loss while maintaining total position size. Below are several dissimilar ETFs, other than the bolded ital.
| ETF | Issuer | Index | Ex Dividend | Expense | Duration |
| TLT | I-SHARES | ICE US TREAS 20+ | 1 OR 2 OF MO | 0.15% | 20+ |
| VGLT | VANGUARD | BLOOMBERG LT TREAS | 1 OR 2 OF MO | 0.03% | 10+ |
| SPTL | SPDR | BLOOMBERG LT TREAS | 1 OR 2 OF MO | 0.03% | 10+ |
| TLH | I-SHARES | ICE US TREAS 10-20 | 1 OR 2 OF MO | 0.15% | 10-20 |
| EDV | VANGUARD | STRIPS (0-COUPON) | 1 OR 2 OF MO | 0.05% | 20-30 |
| ZROZ | PIMCO | STIPS-BASED | APR/1ST OF MO | 0.15% | 25+ |
Every 30 days, if still on the wrong side of the trade, rates are rising, and bond value decreasing, swap ETFs to realize paper loss while maintaining full position, and add to position as able.
When rates do come down and ETFs spike, begin liquidating, understanding that it doesn’t all happen in one day. It took about 3 mo in 2021 to peak, and stayed there another 3 mo. They will be extremely volatile, up 10% one day or week, down 10% the next, then back up. The goal is to at least sell to recover all of paper loss, ideally, historically, it should be much more than that. When this is happening, most likely, things are not good and all other asset classes, except gold probably, are falling. If the reason for fall in rates is QE, then cash long-term is not a good asset. But, that’s another post.
Examples: $100,000 EDV:
- Our stupid investor sitting on a 15% losing position, been wrong for a year.
a. Sell EDV/BuyZROC: $15k loss: collecting monthly dividends, and averaging down.
b. Wrong for another year, rates up to 5.5%, harvested about 5K in dividends, but value down another %15.
c. The Bond King is right six months later. It’s Bloody Tuesday, QE1 declared, rates fall a percent, and ZROZ overshoots to 50% gain in next few months:
i. 18mo of dividends reinvested into position brings total to 108,000
ii. 40% increase=$151,200, offset by over 30k in losses for a taxable gain of 51,200-30+k, or about 20k taxable gain. - Say we have a non-stupid investor who doesn’t even have a losing position, but starts accumulating now. All the above applies other than the initial losing position, and results would be 15k to the positive.
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