Put this down in the list of no-fuss, no-brainer, long-term trades. Simply buy 10-year Treasury notes and short junk bonds. There is no purer deflation play than this. It doesn’t even matter if Treasury yields rise (unlikely anytime soon IMO), since you’re playing the spread and junk yields will always include Treasury yields plus a risk premium.
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What are some other such no brainers for deflation? The closer something is to cash, the better.
- Long gold, short stocks. (Remember, I’m a gold bear for 2010).
- Long gold, short a basket of commodities (silver, platinum, copper, zinc, lead, oil, sugar, lumber, grains, etc).
- Long Treasuries (2, 5, 10), short stocks. This bet is safer the shorter the duration of the treasuries, but to make it work with short-dated notes, you’d have to go long a greater notional value of Treasuries than stocks. This is easy with futures: for example, for every $1M short in ES (S&P500), go long $3M ZF (5-year notes).
- Long US dollar, short hot “developing nation” or commodity nation currencies (Brazil, Australia, Canada, Russia, India, South Africa, etc).
- For later, not just yet: long 5-year treasuries, short 30-year.
- The most hard-core deflation trade of all: long stacks of $100 USD notes, short everything else, or safer yet, don’t even bother with the trading. Just wait for the market to make you an offer you can’t refuse, like a 10% dividend yield on the S&P, or $0.30 copper, $20 oil or $0.05 sugar.
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To make the spread trades work, you’d have to watch your margins, set loose stops and then just leave the trades to do their thing for the next 2-5 years.
