Even Now, This Trade Keeps Raking In The Wins

What will inflation be in 30 years? Of course, no one knows the answer to such a broad, long-term hypothetical like that. We don’t even know what cell phones will look like in 30 years. (If we’re even still using them!)

Yet, there are many individuals who have to act like they know.

One example of this is a pension fund manager. Let’s use CalPERS as our example.

CalPERS (California Public Employee Retirement System) manages benefits for millions of state employees in California. Last year, the fund paid out more than $21 billion. The managers know they need to continue paying benefits forever.

To ensure they can meet those obligations, the managers need to make a series of assumptions. Among those is an expected inflation rate. Inflation will be a factor in future salaries of employees, and many benefits are also based on salaries. That means inflation is an important input into their models.

While fund managers have explicit inflation expectations, they have to take action. And their buying and selling helps determine market prices of assets like stocks and bonds.

Market prices of bonds include a factor for inflation. Economists can use the market price to determine the precise level of inflation expectations built into bond prices.

For now, inflation expectations are low and falling. The chart below shows inflation expectations that are priced into 30-year Treasuries. Current prices imply inflation should average 1.39% a year.


Source: Federal Reserve

Similar calculations show an implied inflation rate of 1.15% over 10 years. Expectations move up slowly over time, indicating traders expect steady inflation.

Interestingly, the expectations are all less than 2%, which is also the Federal Reserve’s inflation target. This means bond prices are unlikely to change much.

If inflation were to rise, bond prices would fall. That’s because interest rates would rise if inflation expectations increase, and bond prices drop when interest rates rise.

Similarly, bond prices rise when current rates decrease. That’s because the older bonds are worth more.

To understand this, think of a (hypothetical) $1,000 bond issued last year with an interest rate of 5%. It pays $50 a year in income. If interest rates fall to 2.5%, the bond still pays $50. To get to a 2.5% yield, the price needs to rise to $2,000. This assumes all other factors remain the same.

How I’m Trading This Information Right Now

With interest rates expected to stay steady or fall, bonds — and, therefore, bond ETFs — remain attractive. That sets up another high-probability income opportunity in iShares 20+ Year Treasury Bond ETF (NYSE: TLT).

If you’ve been following my commentary over the past two months, then TLT has become a familiar face. My Income Trader subscribers and I have made a number of successful trades with it. In fact, since late March, we’ve already sold four different put contracts on this ETF, and each has been closed early for a gain.

TLT Trades During Current Volatility
Date Trade Return Annualized
March 25 Sell TLT Apr 150 Puts 2.0% 91.3%
April 8 Sell TLT May 150 Puts 1.9% 49.5%
April 22 Sell TLT May 161 Puts 1.6% 64.2%
May 6 Sell TLT Jun 147 Puts 0.9% 22.4%

Now, these returns may look somewhat thin on the face of it. But keep in mind that these were made within a matter of days. And when you understand the larger forces at work with TLT, it’s easy to see why not taking these small gains is leaving easy money on the table.

In fact, nothing in my outlook for this ETF has changed, so I expect my latest trade with TLT to quickly turn into yet another win.

Unfortunately, out of fairness to my subscribers, I can’t share the exact details of the trade with you. But just know that it is possible to make successful trades in this market. You have to be nimble, sharp, and willing to venture into new territory from time to time.

It also helps to have an award-winning indicator working for you. We’ve been using this to identify trades since 2013, and have made winning trades more than 90% of the time. And my followers have earned tens of thousands of dollars in income in the process (even hundreds of thousands for some). To learn how you can too, go here now.