vineviz wrote: ↑
Sat Aug 11, 2018 8:04 am
typical.investor wrote: ↑
Sat Aug 11, 2018 12:51 am
Theoretical wrote: ↑
Sat Aug 11, 2018 12:24 am
From what I've read, treasury futures only require something like 3% margin, which for the 60% bonds means they've got a margin requirement of about 1.8% of total assets, meaning the fund is overcollateralized by over 5.5x before it hits a margin call. This is why it is so important that this fund is levering the interest rate futures and not the stocks. There, margin calls are far more likely than they are with the bonds. It doesn't mean bond margin calls can't happen, but those situations would likely be ones where you are already in the hole with a stocks/bonds portfolio anyway.
For a $100k position with 10% or $10k allocated to 6X bonds, the fund's margin account would need what - $1800 [or 3% * 60,000]?
OK, you are 5.5X overcollateralized, but if duration is 5 years and rates rise 3%, bonds lose what - 15%.
So your bond holding has lost $9000. Isn't that amount deducted from the margin account meaning you are facing a call of $800?
Obviously not a problem with $90,000 in stocks, but it would be within the realm of possibility for a fund that didn't hold any stocks and was only 6X treasuries futures to face such a call.
Or are my numbers way off?
If your notional bonds lost $9,000 they’d still be worth $51,000 . So the minimum collateral would be ($52,000 x .03) = $1,560.
Since it allocates 10% of the entire fund to cash collateral ($10k in this example) there’d be no need for more collateral.
I'll be honest and say I don't understand this conceptually.
If the future contract is my promise to buy $10,000 in treasuries $Y (price - expected interest), and the value of the treasuries I promised to buy drops in value, I still promise to pay $Y for those treasuries. Why is my required collateral amount less? I still have to pay $Y.
If what you are saying is true, then I guess it's as the treasuries are expected to revert to par value as maturity approaches. I mean three days before maturity, no matter how much rates from other three day bonds are paying bond, the price can't be much different and will close as maturity approaches.
It's just counter intuitive to me that I need more cash in my account as collateral when treasuries have increased in value, but the price I agreed to pay has not.
Your description seems opposite for margin with stocks where I'd have to deposit more in cash as equity value fell.