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EverydayInvestor (100.00)

Treasury Bonds Offer Return-Free Risk

Recs

19

December 05, 2008 – Comments (20) | RELATED TICKERS: SHY , TLO , TIE

“There are no bad bonds, only bad prices,” the traders used to say. They should say it again, only louder. In the spring of 1984, long-dated Treasuries went begging at yields of nearly 14 per cent in the context of an inflation rate of just 4 per cent. Those, too, were fearful times, the recollected horror being the great inflation of the 1970s. Inflation was ineradicable, the bondphobes said. Now a new generation of creditors espouses the opposite proposition. Deflation is baked in the cake, they say.

See the great article here.

I have just red-thumbed a bunch of Treasury bond ETFs. I would short a long-term Treasury ETF in real life but they are not shortable at my brokers.

20 Comments – Post Your Own

#1) On December 05, 2008 at 2:26 PM, threepaweddog (31.65) wrote:

Or go long TBT if you can't short.  FWIW, it is an "ultra".

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#2) On December 05, 2008 at 2:33 PM, anchak (99.74) wrote:

Michael I think Redding TLT is the right ploy for CAPS - especially since it should inversely correlated with the S&P.

However in RLP : Buying TBT is possibly a better strategy.

 

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#3) On December 05, 2008 at 2:35 PM, EverydayInvestor (100.00) wrote:

Thanks for the heads up on TBT!

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#4) On December 05, 2008 at 2:43 PM, ClearEyez (95.66) wrote:

Ya TBT is good, wish I would of waited a bit longer before putting it on though.

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#5) On December 05, 2008 at 2:47 PM, EverydayInvestor (100.00) wrote:

One reason I hate the inverse ETFs, though, is that they use derivatives and have huge counterparty risk. So for example with TLT, the following banks have entered into derivative contracts with the fund and it accounts for the percentage of assets shown:

Credit Suisse First Boston Corp. 28.16%
JPMorgan Chase & Co. 25.6%
UBS Warburg LLC, 19.46%

 

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#6) On December 05, 2008 at 2:54 PM, camistocks (81.62) wrote:

Great title... however I can imagine that the Fed likes long term rates at this level, to make the banks lend out money to the economy instead of the govenment and to keep mortgage rates down. Bernanke has recently threatened the Fed would buy Treasuries...

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#7) On December 05, 2008 at 2:58 PM, EverydayInvestor (100.00) wrote:

Problem is that even at such low rates banks are too afraid and too undercapitalized to lend. I think this situation has been likened to "pushing on a string". Japan had the same problem. I do not think we will see the same problems Japan had in the 1990s, though.

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#8) On December 05, 2008 at 3:09 PM, EverydayInvestor (100.00) wrote:

Forgot the music video:

Papa N'a Pas Voulu (Mireille)

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#9) On December 05, 2008 at 3:50 PM, anchak (99.74) wrote:

Recd Ya!

This one is real catch-22, you can short TLT thru puts....or go the less adventerous way of TBT - but take on Counterparty risk!

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#10) On December 05, 2008 at 3:57 PM, EverydayInvestor (100.00) wrote:

Although if you short TLT you are also short counterparty risk--if the fund's counterparties blow up then you make money! The options themselves are cleared through the DTCC so there is no real risk with listed options; I will look into that option (pun intended).

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#11) On December 05, 2008 at 5:46 PM, bendlund (99.87) wrote:

You can short more directly using futures - ZB and ZN on Interactive Brokers.

Ultra- and short- etfs are pretty bad at tracking the market - for example, SRS is somehow down on the year and SKF is up a whopping 17%.

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#12) On December 05, 2008 at 10:31 PM, nuf2bdangrus (< 20) wrote:

I sold TBT a day early, having been down 20%.  WIll go back in now that turnaround seems to be in.

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#13) On December 05, 2008 at 11:24 PM, Tastylunch (99.56) wrote:

agreed. good post.

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#14) On December 06, 2008 at 10:42 AM, dexion10 (28.28) wrote:

a recommendation for you on the title of this post alone!

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#15) On December 06, 2008 at 12:14 PM, dangerfairy (98.13) wrote:

I would not short treasuries, EveryDay. You realize that's a bet the Fed will not print more money (and then immediately stick them in treasures.)

 

But either way, as cash is king, treasuries will rally anyways and yields will go EVEN LOWER 

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#16) On December 06, 2008 at 2:05 PM, EverydayInvestor (100.00) wrote:

bendlund - yes, agreed. I don't really know how to play with futures, plus they are time-determined (eg, at X date, I will sell treasuries for X). Ideal would be just selling short an ETF.

anchack - the problem with puts is the high premium.

dangerfairy - I am aware of the risk. I would not recommend anyone shorting anything unless they know what they are doing. But the odds are against bond yields going much lower. The only case in history where a bet on zero interest rate policy was a good long-term play was in Japan in the 1990s. Every other country at every other time, it would have been hugely profitable to short the government's bonds at such low rates.

 

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#17) On December 09, 2008 at 11:50 AM, FleaBagger (99.13) wrote:

A rec for Papa N'a Pas Voulu! Also, are there any ultralong bond ETF's I could buy puts for?

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#18) On December 09, 2008 at 11:56 AM, FleaBagger (99.13) wrote:

Why is TIE related?

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#19) On December 10, 2008 at 10:59 AM, EverydayInvestor (100.00) wrote:

Fleabagger - it is not. I confused it with a similar ticker of a treasury ETF.

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#20) On April 23, 2009 at 6:44 AM, AlvaroX (< 20) wrote:

Another form of bond is iBond. iBonds are not an investor software application for Apple products.  iBonds are a new series of U.S. Treasury bonds that you can order over the internet.  These bonds are a guaranteed investment, as the interest rate for them is adjusted so that it always turns a profit. You won't need a cash advance to float you if the market tanks.  However, it doesn't mean that you'll be raking in the cash – there is a penalty for any withdrawal within five years of purchase, and they stop accruing after thirty.    They aren't a good buffer for debt relief, iBonds are best used as a long term investment.

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