With uncertainty around this week's Fed meeting gripping the bond market, one expert says buying bonds could be a terrific trade.
The iShares Barclays 20-year bond ETF, the TLT, has fallen 5 percent from the highs hit on Feb. 11. In the middle of February, as market uncertainty reigned, expectations for a Federal Reserve rate hike waned. Since then, traders see one or more rate hikes in 2016 as increasingly likely, sending yields higher and bond prices lower.
But those betting on hikes will end up offsides, says Larry McDonald, head of global macro strategy at ACG Analytics.
"[The Fed] desperately wants to put another bullet in the chamber, in terms of hiking rates. So what happens, as the market goes 'risk on,' you have improving economic data and the Fed is dying to hike. Then the dollar gets stronger; that weakens the global economy; that weakens commodities; that weakens oil — the big one. And then you have an economic backlash which provides an amazing screaming 'buy' for bonds," McDonald said Friday on CNBC's "Trading Nation."
Bonds will be particularly appealing, then, if they fall further after a hawkish-sounding Fed decision and press conference Wednesday.
"Every time bonds have sold off since September, the cycle's repeated — and it's going to repeat again," said McDonald.