Charlie Bottle

Treasury Bonds: The Short of the Century

Hausenpepper, thanks for the comment. For what it's worth, i don't think the time is right yet. For example there is still a decent chance we may see deflation this year, so the real reaturn of hodling these securities may still be positive for the next few months. There needs to be a catalist to jump stratrt downfall of treasuries but not clear what it will be and when itwill happen. when it does get ready for a stampede though.

Treasury Bonds: The Short of the Century

My timing on this article was clearly off as it is now patently obvious and as pointed out by several of the comments (fxtrader07, djzvue and others). clerly inflation is of the table for a while and while the US government creditworthiness look even worst know with all the bailouts and the recession looking much worst, there are really not much safe alternatives to treasuries right now. There will come the day to short them but it is probably many months/year(s) off.

Treasury Bonds: The Short of the Century

I stand factually corrected on both cases and also stand 100% behind the logic and resonablensess of the conclusions of the article:

- Tips are pegged to CPI-U which includes food and gas. Please note that this is in no way central to the arguments in the article. I stand by the main argument that inflation is not accuratelly measured for the several reason pointed, and that the focus on core inflation (which is systematically tauted byt the FED and in the media) MAY (I repeat MAY) have some impact on investors perception of inflation and therefore the required return on their bond investments. This just one a several arguments provided and not the main one by any means.

- In the example provided where I mention duration it should read maturity. Maturity is a VERY rough approximation of the sensitivity of a bullet bond price to interest rates (it has the advantage of being very intuitive which is good for an article of this nature); in longer maturity bonds it does differs samewhat from duration.

Duration (McCaulay Duration) as you point out needs to take into account not just the principal repayment but interest coupon; it is the sum of the cash flows discounted by the yield multiplied by the time cashflow divided by the price of the bond (i.e a PV wighted average maturity). In this case, assuming a 4% coupon and that the bond trades at par it would imply a duration of about 8.4 years, and therefore an estimated change in the price of the bond of 25.2% rather than 30%.

Off course Mcauley duration is also an approximation, to be more precise one should use modified duration and to be even more precise one should use convexity, so you can decide how precise you would like to be. The numbers were used to give an idea of the order of magnitude and this in no way changes the merits of the argument, I believe.

Thank you for adding precison to the discussion.

With regards to the second comment (by "djzvue") on the use of leverage, I just wanted to clarify that he must have misread, on the contrary I did NOT recommend the use of leverage and did in fact highlight the increased risk of levergage in such a trade.