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I mainly trade equities and derivatives, however, I'm listening to more and more intelligent economists and fund managers who are talking about how low rates and treasuries will be leading to a major short/near term bond rally.

Raoul Pal, Inflation/Deflation, could go on and on ...

Regardless of what your opinion on what the future hold's given the massive amount of unprecedented variables in the current economy how would one go about trading this hypothetical rally ?

I know there are ETF's like TLT or IEI but these have minimal upside. Been googling for a few hours and haven't found too much information specific to trading short term bond rally. Would this just entail buying futures contracts for 5yr bond and hoping for a significant spread to open up in the next few months ?

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Deficit spending could cause long-term interest rates to increase while short-term interest rates hold. But long-term interest rates are not going to increase while the FRB is buying its own bonds. So I suppose that there are believers in bonds rising further in price. To my view they are high enough in price if they just hold where they are.

Now there are income opportunities in CEF's that leverage TIP's and in CEF's that leverage agency mortgages. And there are income opportunities in mortgage-REIT's if they are mostly agency mortgages.

The new big short is in commercial mortgages.

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  • Do you have any thoughts on what would happen if rates go negative ? I think the presumption is that this would make the bond appreciate quicker Commented Apr 16, 2020 at 12:48
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    Well, the 2-year note is 0.21%, the 5-year note is 0.36%, the 10-year note is 0.63%, and the 30-year bond is 1.22%. If looking for leveraged positions for small bond price movements, then there are futures contracts and there is also "portfolio margin" in stockbroker accounts. Portfolio-margin is much more than two-times the position and portfolio-margin can size a position that draws more bond interest than the cost of institutional margin interest when in 10-year or longer Treasury bonds.
    – S Spring
    Commented Apr 16, 2020 at 22:20
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Not clear what you mean by bond rally, price or interest rate. Given the yield on the 30 year bond is barely above 1%, there's not much downside, which would indicate bond prices have nowhere to go but up. Price and yield move in opposite directions, if the yield goes up, the bond price goes down.

As an aside, Ray Dalio just said recently on Bloomberg that "you'd be pretty crazy to hold bonds".

In any case, if you think that TLT, or for the shorter terms something like SHY (1-3 years) and IEF (7-10 years) are not going to get you there, then you may need to consider leveraged products like options and futures.

Depending on the amount of money you have, regular futures may not be an option given the notional value is very large ($100,000 per contract for 5+ years, with initial margin that will vary depending on your broker and the product). For bonds, I'm not aware there are mini or micro contracts which would be suitable for smaller accounts.

Options might an other thing you could consider for a smaller account, although you need to be right on both the direction, and the timing, as options will decay (if you buy them), and expire. Simplest strategy could be to buy calls on one of the ETF above.

Either way, based on how you framed your question, you'll need to do a lot of research on your own rather that rely on advice you could find here, using leverage is one of the surest way to go bust quickly.

Note: this is not financial advice, and is just for educational purposes (if such a warning is required here).

Edit: to amend the Ray Dalio's quote to make it more accurate.

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  • @PascalBelloncie Yeah I listened to the Dalio interview he seems to be on the other side of the fence from many other smart investors on that, he also lost 20+% of his portfolio in march. I don't think they are saying buy bonds and hold long they are saying buy wait for negative yield offload. Because yields will have to go to 0% or maybe even negative. That pushes the price of current bonds that pay a higher interest rate up. Commented Apr 16, 2020 at 12:47

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