tekennedy (59.19)

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January 18, 2012 – Comments (5) | RELATED TICKERS: TMF , TLT , UBT

Everyone knows that the interest rates on treasuries are at impressive, historically low rates. As rates move closer to 0 it helps to define the risk on a short position while bringing about reasonable gains if rates move to more normal levels, especially longer out in the yield curve. The only problem is it is difficult to place a large bet on this event which will likely occur a fair distance in the future.

I had initiated a fairly small short position in TMF (a 3x long 20+ year treasury ETF) recently as it benefits from the normal decay of leveraged funds while giving me short exposure to treasuries. I was worried due to the small float on the fund and these worries came to pass as I was told I may have to sell the shares tomorrow because my broker no longer has the shares to lend.

Simply put I'm curious what other ideas you may have to benefit from the eventual rise in treasuries' yields.

5 Comments – Post Your Own

#1) On January 18, 2012 at 6:16 PM, MegaShort (99.96) wrote:

As a long term trade it makes sense to me at these levels.

But I would hold off until 2013. I doubt there will be a significant move in Treasuries, at least until the Fed raises rates. In the meantime the leveraged decay will probably not be very large.

You might also watch PIMCO's bets on Treasuries, given that Bill Gross has already tried taking position (and gave up) he might have better timing the next time.

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#2) On January 18, 2012 at 6:24 PM, MegaShort (99.96) wrote:

By the way do you know what your broker's margin rate is?

http://www.onlinebrokerrev.com/commissions_and_fees/margin-rates2.php

Most are pretty steep, which definitely argues against longer term short positions.

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#3) On January 19, 2012 at 11:23 AM, leohaas (98.74) wrote:

Start a hedge fund and find suckers who are willing to take the other side of your bet. That is how some folks foreseeing the collapse of the mortgage securitization industry did it.

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#4) On January 23, 2012 at 9:27 AM, somrh (80.01) wrote:

One option (pun intended) that might work are options. Many ETFs have options on them. Here's a list:

http://www.cboe.com/Products/optionsOnETFs.aspx

Occassionally you can find LEAPS that might extend to say, Jan 2014. My guess is that put options are going to be very expensive so aren't worth the trouble.

One alternative to this would be to execute bear call spreads. Simply shorting naked calls is pretty risky as there is unlimited downside without much upside (you only get the premium) and have higher margin requirements. But shorting a call and buying another one (at a higher strike price) can allow you to make a little bit of money without as much risk.

As an example TLT has Jan 2014 options on it. Puts look pretty pricy. Calls aren't that expensive so you're not going to make a lot of money on this but it's an option (oh the puns!).

You could short $110 strike price call for about $13.50 and buy $120 strike price for about $8. The net result would be $5.50 cash (I'm roundinig last trades so YMMV). Your maximum risk would be $10 ($120 - $110) so the most you could lose is about $4.50.

Just keep a close eye on transaction costs as many brokers are not option friendly when it comes to fees that are charged.

Aside from that I think what Megashort points out is that this is a bet that many people would like to do so finding good opportunities to profit from it are going to be difficult. Good luck.

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#5) On January 24, 2012 at 1:40 PM, MegaShort (99.96) wrote: