James Grant: Short LQD Before Bonds Fall

By
Olly Ludwig
February 14, 2013
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The bond market will melt down, and shorting LQD looms large as a way to play it, James Grant says.

Sooner or later the bond market is going to start falling, and a perfect exchange-traded vehicle to play the unraveling of the more-than-three-decade rally in fixed-income markets is “LQD,” a corporate bond fund that happens to be one of the largest fixed-income ETFs in the world, James Grant told attendees at IndexUniverse’s Inside ETFs conference this week.

But Grant, the editor and publisher of Grant’s Interest Rate Observer, said that while he is short the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD), it’s terribly difficult to time such trades, as markets are “unreliably efficient” and “reliably inefficient,” and, moreover, that the Federal Reserve’s loose-money policies since 2008 essentially mean that interest rates are tightly controlled and not shifting in any sort of free-market manner.

Grant’s comment about LQD came in response to a question from IndexUniverse Chief Executive Officer and founder Jim Wiandt, who introduced Grant and asked what investors—faced with the prospect of the end of a secular bull market in bonds since the early 1980s—should now do.

“Short,” said Grant. “I’m short something called LQD.”  The ETF is quite liquid and has $24 billion in assets under management.

Grant, a longtime critic of the Fed and a proponent of a return to the gold standard, was the grand finale at the 6th annual Inside ETFs conference, which took place in Hollywood, Fla., from Feb. 10-12. The event, which has become the see-and-be seen event in the world of ETFs, was attended by nearly 1,300 people, most of them financial advisors and fund sponsors.

Regarding the end of the 30-year rally in bonds, Grant said he takes very seriously the possibility that interest rates will move up swiftly when the bond market does start to unravel.

“I could see a very quick and violent—and tradable—upward move in rates,” he said, adding that while it’s anybody’s guess when that truly gets under way, “There’s no shortage of poetic signs and portents” that it most surely will.

HYG, GLD, GDX And Beyond

Commenting on other pockets of the bond universe, Grant said the vast popularity of junk bond ETFs such as the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: HYG) and the $12 billion SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) have helped push down their yields to well below other pockets of the junk market.

In other words, the ETFs have created a dislocation of sorts in the high-yield market such that credits not found in funds like HYG and JNK are yielding as many as 200 basis points more than the junk ETFs.

“The small-cap wing of the junk bond market does offer commanding values,” Grant said.

Grant also extolled the significance of the gold bullion ETF SPDR Gold Shares (NYSEArca: GLD), calling its launch in November 2004 “transformative” in that it finally made access to the gold market an easy thing for investors everywhere.

In the here and now, however, Grant said gold mining stocks appear to him to be undervalued and the time may be ripe to play the Market Vectors Gold Miners ETF (NYSEArca: GDX) instead of GLD.

“I put it to you now that the time may be here to look at the GDX rather than GLD,” he said.

 

ETF DAILY DATA

Massive inflows into U.S. equity funds on Monday, Dec. 22, propelled total ETF assets to a new record.

'SPY' raked in more than $12 billion Monday, Dec. 22, pacing State Street's issuer-leading inflows on the day, as total U.S.-listed ETF assets jumped to $2.005 trillion.

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