How About This for a Hedge Combo: TBT and TLT

From the hmm, this might be interesting file...

The chart above 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 TBT would have $14,898 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 zigzag 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.

Comments

[String:]

Well Rog,
You've been advocating this for a long time.
And the way it's goin', TBT will be at Zero before the Long Bond rate gets there.
Right now the long bond is at 1960's rates, about 4%
But inflation is at 4 times 1960's rates, about 6% or much higher.
Real returns are big negative.
Does that mean I have to pay ProShares at divi time?
When Wall Street stops having "systemic collapse" panic attacks and stops using the long bond as their personal Money Market Fund maybe then rates will reflect inflation and generate positive REAL returns.
Does depression and bond default mean rates go to infinity.
That should make TBT very attractive.
When Lehman rolls over and dies, I hope to hell they don't steal TBT.

2008 Sep 11 12:10 PM

[sportpic:]

Does Lehman default effect the safety of TBT?


On Sep 11 12:10 PM TBTer wrote:

> Well Rog,
> You've been advocating this for a long time.
> And the way it's goin', TBT will be at Zero before the Long Bond
> rate gets there.
> Right now the long bond is at 1960's rates, about 4%
> But inflation is at 4 times 1960's rates, about 6% or much higher.

>
> Real returns are big negative.
> Does that mean I have to pay ProShares at divi time?
> When Wall Street stops having "systemic collapse" panic attacks and
> stops using the long bond as their personal Money Market Fund maybe
> then rates will reflect inflation and generate positive REAL returns.

>
> Does depression and bond default mean rates go to infinity.
> That should make TBT very attractive.
> When Lehman rolls over and dies, I hope to hell they don't steal
> TBT.

2008 Sep 15 12:03 PM

[String:]

Hey Rog,
It Monday after the Sunday....
Still think Lehman is going to pay a divi on this?

2008 Sep 15 06:32 PM

[RSP:]

Dear Mr. Nusbaum, you say:
"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."

Don't get me wrong here -- 4% on TBT would be awesome. But it seems too good to be true. Can you tell us where you got the "4% yield" for TBT? It does not make sense to me that you should get any interest when shorting treasuries (should be the other way around).

I hope you can backup your statements with a source/link.

DISCLOSURE: I am long TBT

Jan 08 07:16 AM

[PortableAlpha:]

Well, as of market close today, the short long-treasuries theory has seen yields on the 30 year drop by about 20.5%, while this hedge is down only 15% (since the close on May 22).

I still don't think that this is a perfect hedge, though. TBT is a mess because they don't actually bother shorting the t-bonds. ProShares uses derivatives to track the movement of the yields, to get double the daily rate. And whenever you're talking about double the daily price movement, things get sticky.

But, the charts do say that the mirror is working pretty well on the whole. I do wish you had sourced the 8% price movement per 100 bps, though. But if that holds, and rates move to 6% (a 230 bps move to a place where rates have not been since June of 2000), then you'd get about 18.5% (ignoring dividends).

And moving to 6% wouldn't be overnight, either. So 18% over maybe 3 years. So you'd be lucky to beat inflation by 150 bps a year or so.

This is a nice theoretical exercise, but you'd do better in TIPS.

Feb 06 04:51 PM

[Geldpress:]

Check out this article on TBT risks before jumping into the TBT:
www.geldpress.com/2009.../

May 23 02:36 PM