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.
To take advantage of such a cycle, he recommends initiating long positions in the TLT ETF.
But not everyone thinks bonds are a sure-fire way to conquer uncertainty surrounding the Fed.
"From our perspective, I don't want to be owning bonds at this point in time. I think this bull market in bonds is over, and we continue to think that equities are where you want to be," Craig Johnson of Piper Jaffray said on "Trading Nation." "I think yields are heading higher."
According to Johnson, a technical analyst, the TLT has recently violated the lower end of the price channel, pointing to further losses ahead — perhaps as low at $115.
With the TLT opening Monday at $127.87, that would represent a 10 percent drop from current levels.