From the hmm, this might be interesting file...The chart compares the Double Short Long Bond ETF (TBT) versus the Single Long Long Bond ETF (TLT) since TBT's inception.
I have been in the camp that thinks US interest rates are going up. This call has been wrong or early (take your pick) but I still believe it will be the case. If that turns out to be correct then longer dated bond funds stand to get hit. As a rule of thumb an increase in rates of 100 basis points on long dated paper could be expected to cause an 8% drop in price. With individual issues you do get the par value back at the end but with funds there is no par value that has to be made back.
With about three months of data (not a huge sample, I admit) it looks like TBT is zigging against TLT's zag. Since inception of TBT yields have dropped a little so TBT is down in price.
An investor putting $10,000 into TLT on May 22 (day one for TBT) and $5000 into TBTwould have $14898 at yesterday's close plus two dividends from TLT totaling $73.04. So in this example the net loss was $29 or 0.019% which is pretty good if the position really is hedged and considering that he market went against the position.
One administrative note about TBT is that it too pays a dividend but the dividend should be annual at the end of the year and represent t-bill interest less the expense ratio. If rates do go up, including t-bill rates, then TBT would probably pay much more than it is likely to pay now.
A combo of TLT and TBT where TLT yields 6% and TBT yields 4% and the portfolio is protected from rising rates sounds pretty good to me.
Obviously the idea makes no sense at all for anyone disagreeing with the higher rate scenario. Personally I would need a little more time to be convinced the zig zag will stand up. The objective of TBT is twice the inverse on a daily basis. I think the reason it appears to be working for now is that market captured is much less volatile than equities where the leveraged products are a little less predictable.If there is any there there then a TLT TBT combo could be thought of as the basic strategic building block. Anyone so inclined to tinker might come up with other ways (meaning other products) to implement some sort of hedged combo. In the context of brainstorming and exploring, anything goes at this point.
Yaz, get well soon. Last night, Red Sox announcer Jerry Remy said that Yaz would be getting bypass surgery at Mass General. Later in the game they reported that the surgery was successful.
8 comments:
I pulled up a chart yesterday of BWX and UUP--mirror images, as you might expect. I didn't do any calculations, but I wouldn't be surprised to find something similar to the pair that you posted today. The dynamic was simply interesting to me because it seems driven by the recent strength in the dollar, not interest rates. Maybe just another way to hedge.
UUP v BWX makes sense but UUP is not levered? So it would require more capital to hedge?
One thingis certain, we are seeing more access to sophisticated concepts which is a great thing for people who understand moderation.
Roger, this idea is dangerous. In a volatile sideways market, the daily computation of the price change is profitable, but in a trending market--i.e., if rumors start developing over a period of weeks that interest rates may be cut!--the daily compounding effect on the leveraged fund can overpower the hedge. I've seen this on charts of other pairs like this. You might want to run some more tests or calculations for varying market conditions.
you may be right about this turning out to be a bad concept, I say brainstorming and exploring.
i would note that if rates go down the leveraged product will not overtake the long position (is that what you mean?), if rates go down the TBT would drop in price.
lastly fixed income is less volatile the vast majority of the time than equities which is the reason why i am even trying to see if there is anything to this...and again there might not be anything here.
I don't get it. What's the point in going short and long the same thing? It will have a beta of zero to the bond market, a negative alpha from the two expense ratios plus you are effectively paying the risk free rate on leveraged half of TBT... Aalan's comment is incorrect. These products don't work that way.
the point is to question whether in a rising rate environment you can collect both yields (presuming TBT would have have a higher yield at that point) and offset the decline.
there should be no expectation they work that way but with treasuries being less volatile than equities might it deliver the effect anyway?
It has thus far, which guarantees nothing for the future.
Now the task would be to work from there regardless of what you think about this specifically. Can TBT offer any value as a long term hedge? if so what is that value? how can it be incorporated into a fixed income portfolio?
think outside the lines a bit.
Based on my analysis of SSO and my udnerstanding of how this product works the total return on TBT would be expected to be negative twice the return on the underlying bonds minus one times the risk free rate minus the expense ratio. The return on TLT is one times the return on the underlying bonds. So going long say $1000 of TLT and $500 of TBT would result in a return of:
- TLT expense ratio - 0.5* TBT expense ratio - 0.5* risk free rate
which is negative.
TBT could be a hedge on a more diverse bond portfolio of course and make sense there.
Roger,
I agree with MooM, this idea won't work. I've seen you post similar ideas in the past, maybe combining SPY with SDS or something like that?
The problem with all of the variants of this idea is that you're combining long and short securities in such a way that you've created a perfect hedge, i.e. a risk-free investment. Doesn't it seem reasonable that a risk-free investment must yield a risk-free return (i.e., T-bill) minus expenses? Otherwise, you've invented an infinite money-making machine, and you certainly shouldn't be telling anybody about it on a blog!
For instance, if you really could buy TLT and TBT in the 2:1 ratio you described, and earn (say) 8% on every dollar invested in TLT (6% + 0.5*4%), then haven't you just invented a risk-free way of making an infinite amount of money? Just by the TLT/TBT pair on margin, and as long as your margin rate is much lower than 8% (e.g., margin rate is currently ~3.4% at Interactive Brokers) then you can earn tons of interest income risk-free using your broker's money.
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