Weekly Update: How to Profit from Higher Interest Rates
Good evening, and welcome to this week’s edition of Stealth Trades!
I hope you had a wonderful Easter with your family.
Our office was closed for Good Friday, so I am sending my weekly newsletter today instead of the usual Friday evening delivery.
And this week, I wanted to share my outlook on interest rates and lay out a trade that should make money if yields continue to rise.
Below is a chart of the 20-year Treasury yield which currently sits at 4.9%.
If you look closely, you’ll notice a breakout pattern forming that wants to go higher.
It looks like this:
This is eerily similar to what I pointed out in gold in this very newsletter back in April 2024 when gold was breaking out above $2,300.
Now look, I don’t like this any more than you do. I was optimistically hoping for lower interest rates this year. They were all but promised by the Fed and the Trump administration.
But the bond market disagrees.
And when bond yields rise, the value of bonds goes down.
Here is a chart of TLT, the 20-year bond ETF:
It is the exact inverse of the 20-year yield chart.
I expect yields to go up and TLT to go down. And here’s how the math works…
For every 50 basis points (0.50%) that bond yields rise, TLT goes down roughly 10%.
For reference, bond yields have risen 50 basis points since the Iran war started, so it is entirely reasonable to assume we could see more by the end of the year.
To potentially profit off this move, investors can buy the TLT Dec18 $80 put option. As of this writing, it sells for $1.50 per share ($150 per contract).
This gives short exposure to the Treasury bond market until December 18, 2026. If yields rise 0.5% by then, the value of this option should double. If they rise a full 1% (which, again, is entirely reasonable given the rise in inflation) this option should deliver a 670% gain.
This is, in no way, a sure thing. It is entirely possible that I am wrong, the Fed will cut interest rates despite above-average, rising inflation and increased debt spending.
If that happens, this trade will be a loser.
But, as much as he wants them, I just do not think President Trump is going to get lower interest rates this year.
The recent spike in energy prices is ramping up inflation once again. The administration has proposed a 50% increase in the defense budget. Deficit spending is levels we have never seen outside of COVID. And the rest of the world is aggressively selling off their US debt holdings in a global trend of de-dollarization.
The research points me to assume higher rates. And this option trade will profit from that event.
Best wishes for your trading,
