Take care with TBT.  It attempts to provide double the inverse daily return of TLT....i.e., if TLT is down 1% today, TBT should be up roughly 2%.  Note that the base prices to which those % apply are very different for the two ETFs.  There is a similar double inverse ETF for 7-10-yr tracker IEF but I don't recall the symbol.

Regards, Dick 

capecod:

Take care with TBT.  It attempts to provide double the inverse daily return of TLT....i.e., if TLT is down 1% today, TBT should be up roughly 2%.  Note that the base prices to which those % apply are very different for the two ETFs.  There is a similar double inverse ETF for 7-10-yr tracker IEF but I don't recall the symbol.

Regards, Dick 

 PST.

TBT and PST are giving the same signals. I'm going with TBT.

chili

With rates near historical lows (50+ years), there is a decent chance they will revert to their mean - at least sometime in the future. Question is how long.

Assuming interest rates magically stayed fixed - Would the price of either TBT or PST "bleed" over a long period of time? That is, due to the inefficiencies of the vehicle, would they loose money if rates remained fixed.

Thanks to all for this interesting thread.

tony

proto123:

With rates near historical lows (50+ years), there is a decent chance they will revert to their mean - at least sometime in the future. Question is how long.

Assuming interest rates magically stayed fixed - Would the price of either TBT or PST "bleed" over a long period of time? That is, due to the inefficiencies of the vehicle, would they loose money if rates remained fixed.

Thanks to all for this interesting thread.

tony

Since PST tries to achieve the twice of the daily inverse performance of Lehman Brothers 7-10 Year U.S. Treasury Index ( I believe it has to be total return that includes the distributions )  then in case the rates remained unchanged the total performance of the Lehman Brothers 7-10 Year U.S. Treasury Index still to be positive and therefore PST would lose money.

Also recommended reading:

 http://www.proshares.com/funds/performance/UnderstandingProSharesLongTermPerformance.html

Outside an IRA or 401k just short Vanguard EDV (Extended Duration Strip Tbonds ETF).  The EDV is composed of long term strips, that is the interest payments have been stripped and what is left is the zero cupon bond which moves inverse to the bond yield at a much higher rate than the underlying interest paying bond. EDV closed friday at 136.08 down 6.72% compared to the TBT (ultra short long treasury) which was up 3.37%. The EDV does not use any leverage and does not pay monthly interest making it an ideal short candidate.  Granted the costs of going short include the margin interest but the return is almost 2x that of TBT on the short side without any internal leverage.

one additional caution for TBT is the suprise short term capital gain distributions of leveraged ETFs some as high as 86% for holding a short ETF on the wrong day in 2008 ouch!

It looks to me like the trade is: short EDV then invest the short sale proceeds long QLD (2x long NASDAQ 100)... now that should be exciting!

Additional thoughts on shorting the 7-10 yr treasuries.  The essence of the last FED statement was that the Federal Reserve would do what ever necessary to lower  mortgage rates, and flush investors from the safety of treasuries.  Many mortgage products are indexed to the 10yr treasury.  Look for the FED to buy the 5 - 10 yr bills to keep the rate low and treasury prices high.  I personally would not trade against the FED and by no means short the 10's right now, however look for the rate on the 30yr to rise dramatically in the coming weeks.  The tbond March future looks to have topped and is heading south fast..   As with any short,  time gets compressed meaning market moves that take place over months now may happen in days or hours...so now is the time.

JaphyAZ:

Outside an IRA or 401k just short Vanguard EDV (Extended Duration Strip Tbonds ETF).  The EDV is composed of long term strips, that is the interest payments have been stripped and what is left is the zero cupon bond which moves inverse to the bond yield at a much higher rate than the underlying interest paying bond. EDV closed friday at 136.08 down 6.72% compared to the TBT (ultra short long treasury) which was up 3.37%. The EDV does not use any leverage and does not pay monthly interest making it an ideal short candidate. 

Thank you for suggesting EDV. Would you care to elaborate more on how the strips work?  My understanding is that even though they don't pay out the interest it's sold at discount to it's face value so interest is built-in in the price of the bond and added to the NAV as bond nears the maturity date. Is this correct? So when shorting the zero coupon bond it's price change still has to be greater then interest added in order to be profitable. Is this so?

On the second thought because they are long term strips this might explain your point that they are ideal for shorting treasury.

This is a good explaination.. I lifted it from Wikipedia..

STRIPS

Separate Trading of Registered Interest and Principal Securities (or STRIPS) are T-Notes, T-Bonds and TIPS whose interest and principal portions of the security have been separated, or "stripped"; these may then be sold separately (in units of $1000 face value) in the secondary market. The name derives from the days before computerization, when paper bonds were physically traded; traders would literally tear the interest coupons off of paper securities for separate resale.

The government does not directly issue STRIPS; they are formed by investment banks or brokerage firms, but the government does register STRIPS in its book-entry system. They cannot be bought through TreasuryDirect, but only through a broker.

STRIPS are used by the Treasury and split into individual principal and interest payments, which get resold in the form of zero-coupon bonds. Because they then pay no interest, there isn't any interest to re-invest, and so there is no reinvestment risk with STRIPS.

you can calculate the value given the cupon rate and duration in excel or a financial calculator using the present value formula.  The bond is essentially discounted at the time it is sold and will mature at the par value sometime in the future without any interest payments.

your understanding of the mechanism is exactly correct. 

Shorting EDV should be just like shorting any other stock.  The price of EDV will move inverse to the long treasury yield.  The EDV is representitive of an index.  The Vanguard web page provides a detailed summary and prospectus.  EDV is updated constantly and holds about 50 bonds of varying maturity... so it should behave just like a stock as far as shorting.

Deveil is in the details, as always.  It's correct that shorting EDV should generate returns roughly equal to 2 times (actually 1.75578 times) the inverse of TLT.  That's because EDV has a duration of 24.3  while TLT has a duration of 13.84.  This feature of single payment zero coupons makes them dollar-for-dollar significantly more explosive than treasuries of roughly like MATURITIES.  However, TBT underperforms (or overperforms) against expectations pretty often because it appears to be composed of derivative structures intended to mimic minus2X return of TLT that may be inefficient and - after all - it's guys like us trading these things and effectively "setting" their market prices, and we get excited / have brain cramps / panic / etc. which guarantees the market prices will not function as perfect hedges.

Regards, Dick

I have reservations about TBT.  The first is unexpected capital gains distributions that are the result of artificially creating an inverse 2x of the interm. to long treasury.  Looking at leveraged short ETFs for the last several months most had significant and unexpected short term distributions.  The second reservation is the FED will likely keep a lid on the 10yr yields to pressure the banks and other investors to move away from treasuries.  There may be less pressure on the 20's and 30's.    As the aaa corporates narrow the spread either the aaa corporate yields need to drop or the t bond yield needs to rise or both.  The advantage of shorting EDV would be that the proceeds of the short could be used to go long equity or high yield corporates.  In mid November EDV traded at 103 - 105 and recently was over 150. In the last 2 trading sessions EDV has dropped to 136.  Should the long bonds revert to the price where EDV traded at 103 - 105 that would provide a 30-40% return on the short side. On the long side the S&P could easily go to 1010 from 923 (now) about 9% or using the 2x long S&P that would make it 18%.... and all of this could happen in the next couple of weeks... (bull that I am)  with stops on both long and short positions the downside is limited, the upside is over 50%. An alternative might be VZ or PFE for the long trade.  The yield of 5.3% for VZ and 7% for PFE should offset the margin expenses. Both VZ and PFE are above the 50d moving averages. If the timing is right it is possible to collect 2 dividends on VZ or PFE in just over 1 quarter.  My only reservation is that this trade seems too obvious and may end in a long bond short squeeze.

.

Nice analysis....I suspect you'll have a "purer" trade with equity index than individual stocks that introduce specific company risk (e.g., if it was suddenly revealed that talking on the phone while taking viagra causes cancer).  Have you had any difficulty borrowing EDV or with liquidity in trading the issue? 

Regards, Dick

I am looking at the average volume over the last several months and EDV is thinly traded.. not a good sign.

I was looking to get short long tbonds when I found this thread so I have not traded EDV. ..yet! I was waiting to see the long bond price trend break.   It is always welcome for others to look for the possible pitfalls.. and liquidity seems to be one.  I will call my broker to find if I can just short the strips directly... that I dont like either  because TD provides poor access to bonds online.  As volitile as the long strips are it would be dangerous to not be able to keep a constant vigil. 

I am chuckling about the viagara/phone scenerio .. but you are right it is a fickle market.  I looked at the SDY (high dividend spyder) but it is full of financials .. I dont like that either and that is why I would more likely choose VZ or PFE. 

Shorts in EDV knocked em dead today.  Exquisite call.  Hope you got some of the trade.

Regards, Dick

Well, under the heading if it is too good to be true, it is NOT !!!!

I too think that there is a Treasury bubble and am looking at a way to capitalize on it.However taking a position on TBT or PST is not the way to do it. I read the prospectus this morning and here is why you can not do it. What these ultra short ETF's do is do an inverse of what the Lehman treasury index does on a given day ONLY.

I called someone at Pro shares on the phone to get a clear understanding on it. The only way to make money with these ETF's is if the 10 year note for an example goes straight from yielding 2.2% to say 4%. Since there is a RESET every day of the index, if the 10 year Treasury goes from say 2.2% to 2.7%, then back down to 2.4%, then to 3.0%, then back down to 2.5% then to 3.2%, back to 2.6% and back and forth on its way to 4% or higher, you will not only not double or triple your money, you will lose money on these ETF's. This was confirmed to me this morning by someone at Pro shares themself. They said that the ETF that shorts the real estate market in 2008 lost money !

I am not saying that you won't make money on these if the bubble bursts, I am just saying that based on the volatility of the treasury market, you will not make the money that you think that you will make and possibly lose money on a winning call.

What I am looking to do is short the ETF TLT.  That is the ETF that goes up as the 30 year Treasury bill goes up and yield goes down without the leverage or the reset. It isn't easy to do. You can't do it on line and you most likely will have to pay a 3% fee to borrow the shares but at least if the 30 year treasury bill yield goes up, you will make money

If anyone has any thoughts on shorting TLT, then I am happy to hear it.

There's a very good article in Barron's this week about the pitfalls of using leveraged ETF's
Leveraged ETFs' numbers don't always add up.

"....ProShares UltraShort FTSE/Xinhua China 25, a leveraged exchange-traded fund (ticker: FXP) designed to go up by as much as twice the percentage that the FTSE/Xinhua China 25 Index falls on a given day.The math of leveraged ETFs may not add up for long-term investors, although it can work for traders. When Chinese stocks crashed by 34% over the following four months, shouldn't you have reaped a gaudy return around 68%? Not exactly. In fact, you would have lost 56%."

  - Mike S

EXACTLY !!!!!!!

I didn't read that article but I did hear about it. I did read an article in the WSJ on how the numbers on these ultra short ETF's just don't add up.

I am hoping that if I short the ETF that goes long TLT, the ishares that isn't leveraged, that should work.

Another relevant article at Seekinalpha

Why I Feel TBT Is About to Become a Goldmine

 Be sure to read through the comments, a lot of experienced traders share their strategies and thoughts on how/when to profit from the low treasury yields.

 - Mike S

Thanks Mike. There were a lot of comments. I am not a trader so I am not thrilled with an option strategy of doing puts on TLT. Unless I can think of something else or unless I see something better here, I will just short TLT which I can do with a 3% up front fee.

If I have to pay 3% to  make 50%, I will do it, and soon LOL!!

FYI-I have been trying to short TLT for a week and a half and there are  no shares available to short + I would have to pay a 3% fee to do so.

I took a small position in TBT knowing what the risks are.

TBT was marching steadily upward, but it had a hiccup last week.  Just the result of investors retreating to treasuries when the market legged down, I suppose.  The question now:  will the TBT's march upward resume next week?  And is that march upward going to be completely controlled by investor fear if we retest November lows?

Enquiring minds want to know.

comico

Well I entertained that same idea after Selling My Treasuries VFITX and VUSTX first week Jan.and Use Pro Funds

But, Then I figured..

1. Even if they drop -5% and I get double inverse of -10%? Big Deal

2. On a Per $10,000 Cost Basis? I make $1,000 - 28% SCG's and net A big whooping $720 per $10k..Whooopie do.

3. Not even Going with $100k = $7,200 on such a gamble would be worth it to me..and the Fed can change the game on Treasuries at any Hour.. Guess depends on your timeframe

4. Now going short on the S&P 500 has paid alot better and a surer bet since early last yr..and UXPIX as well.

With the reset, the only way to make money with this is to trade it. I sold my position a couple of weeks ago, making a nice 8% profit. I went back in a day later and I have given back most of the profit. I plan on sticking with it for awhile.