(NEW) WisdomTree 90/60 U.S. Balanced Fund

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typical.investor
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » 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?

ThrustVectoring
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by ThrustVectoring » Sat Aug 11, 2018 3:53 am

I didn't see what duration bonds they were buying with the 60% allocation. It makes a huge difference whether they're playing in the 2-year treasury futures market or the 10-year.

Like, from a risk perspective, you can very roughly measure your risk limit through the margin requirements of the futures contracts - they're all vaguely designed so that your posted margin can withstand one day of price movement in advance. So the S&P 500 e-mini futures contract specs are (as of today) $50 x S&P 500 price = $142k, and require $5800 of maintenance margin, for a ratio of roughly 24. The two-year treasury future contract has a notional value of $200k and requires a maintenance margin of $525 (well, that's for the next contract, the current contract is less at $460 since we're near the end of the quarterly contract roll so the duration is lower), for a ratio of 380.

380 / 24 = 15.8, so call it 15 to be on the conservative end. So, very roughly, the equivalent risk of a 100% equity portfolio is something like 1500% on the two-year treasury futures contract. With the same math on the 10-year Treasury contract, you wind up with 400%.

Honestly, you should probably just DIY it on the treasury futures contracts. Pick up a 2-year long futures contract for every $13k of portfolio equity you want to tie up covering the futures position. And just to sanity check things, if interest rates go up 2%, you'd lose 4% of 200k or $8k, which would be pretty catastrophic but not "my portfolio is completely wiped out". And interest rates going up that much that quickly is pretty much unheard of.

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vineviz
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by vineviz » 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.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

ThrustVectoring
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by ThrustVectoring » Sat Aug 11, 2018 1:23 pm

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.
It depends on the futures contract - longer duration bond futures require more collateral, because there's bigger price swings in response to interest rate changes. You can look up margin requirements and contract definitions here, the 2-year one has $525 of margin required for $200,000 of notional value, so roughly a quarter of a percent. The 30-year ultra bond future contract is the one that requires that much margin, at $3300 for a $100k notional value.

manusnd1
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by manusnd1 » Sat Aug 11, 2018 1:33 pm

When the fund is holding treasury note or tbill futures? Is it getting interest payments on the futures that it owns? Would not getting interest payment hurt returns.

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whodidntante
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by whodidntante » Sat Aug 11, 2018 2:01 pm

manusnd1 wrote:
Sat Aug 11, 2018 1:33 pm
When the fund is holding treasury note or tbill futures? Is it getting interest payments on the futures that it owns? Would not getting interest payment hurt returns.
Treasury futures act something like a zero coupon bond. The dividends from the underlying asset are baked into the future value. So you indeed "get" the dividends if you hold the contract.

ThrustVectoring
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by ThrustVectoring » Sat Aug 11, 2018 8:34 pm

whodidntante wrote:
Sat Aug 11, 2018 2:01 pm
manusnd1 wrote:
Sat Aug 11, 2018 1:33 pm
When the fund is holding treasury note or tbill futures? Is it getting interest payments on the futures that it owns? Would not getting interest payment hurt returns.
Treasury futures act something like a zero coupon bond. The dividends from the underlying asset are baked into the future value. So you indeed "get" the dividends if you hold the contract.
It's actually better than getting interest payments, since treasury futures get Section 1256 treatment as 60% long-term + 40% short-term capital gains, whereas the underlying bond earns interest taxed as ordinary income.

typical.investor
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Sat Aug 11, 2018 9:15 pm

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.

Anyway...

hdas
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by hdas » Sat Aug 11, 2018 9:50 pm

typical.investor wrote:
Sat Aug 11, 2018 9:15 pm
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.

Anyway...
You seem extremely confused about how a future contract works. I recommend you this book:

https://www.amazon.com/Options-Futures- ... b_title_bk

And this abreviated CME guide:

https://www.cmegroup.com/education/file ... utures.pdf

I believe derivatives can be immensely useful but I suggest you abstain from anything related to derivatives until you understand how those products work.

typical.investor
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Sat Aug 11, 2018 10:10 pm

hdas wrote:
Sat Aug 11, 2018 9:50 pm

You seem extremely confused about how a future contract works.
You think?
hdas wrote:
Sat Aug 11, 2018 9:50 pm
I recommend you this book:

https://www.amazon.com/Options-Futures- ... b_title_bk
Thanks, that's very helpful.

I was missing the daily settlement ... loss from your margin account and reset of margin requirement ...
hdas wrote:
Sat Aug 11, 2018 9:50 pm
And this abreviated CME guide:

https://www.cmegroup.com/education/file ... utures.pdf
I looked at that site and even tried some practice trades that informed me the initial margin requirements, but didn't find daily settlement.

hdas wrote:
Sat Aug 11, 2018 9:50 pm
I believe derivatives can be immensely useful but I suggest you abstain from anything related to derivatives until you understand how those products work.
Good advice. I know I don't understand and am just throwing out hypothesis to get confirmed or rejected. It's not like I think I understand this stuff.

stlutz
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by stlutz » Sat Aug 11, 2018 10:16 pm

So is this a mild form of risk-parity trading or a different beast entirely?
Not really. The goal of risk parity is that each asset class contributes the same amount of risk to the portfolio. This takes a 60/40 portfolio and levers both the stocks and bonds by 1.5. Risk parity would only lever the bonds such that they contribute the same amount of risk the portfolio as the stocks do. Risk parity also adds in more assets than stocks and bonds.

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whodidntante
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by whodidntante » Sun Aug 12, 2018 2:46 pm

hdas wrote:
Sat Aug 11, 2018 9:50 pm

I recommend you this book:

https://www.amazon.com/Options-Futures- ... b_title_bk
I realize your post was not directed at me, but I have an MBA, and I've never read a book that is exclusively about derivatives. So I feel my knowledge on the subject is too casual. I ordered a copy of this book as it seems to have good treatment of the subject and has good reviews. I didn't order from Amazon however, as I want the knowledge without the high price.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by columbia » Sun Aug 12, 2018 4:13 pm

whodidntante wrote:
Sun Aug 12, 2018 2:46 pm
hdas wrote:
Sat Aug 11, 2018 9:50 pm

I recommend you this book:

https://www.amazon.com/Options-Futures- ... b_title_bk
I realize your post was not directed at me, but I have an MBA, and I've never read a book that is exclusively about derivatives. So I feel my knowledge on the subject is too casual. I ordered a copy of this book as it seems to have good treatment of the subject and has good reviews. I didn't order from Amazon however, as I want the knowledge without the high price.
Those twins with bald heads and pony tails on CNBC hawk a book on options; I’m guessing the above is a better treatment of the subject. :)

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by desafinado » Sun Aug 12, 2018 9:32 pm

I'm still working through the Hull book but I think it should be required reading, along with Larry Harris' "Trading and Exchanges" for people who think the mechanics of this stuff is interesting.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by triceratop » Sun Aug 12, 2018 10:35 pm

desafinado wrote:
Sun Aug 12, 2018 9:32 pm
I'm still working through the Hull book but I think it should be required reading, along with Larry Harris' "Trading and Exchanges" for people who think the mechanics of this stuff is interesting.
I have been reading Harris' book. Highly interesting stuff! I recommend it too.

Looks like I need to pick up Hull too.
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BanditKing
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by BanditKing » Tue Aug 21, 2018 11:45 am

As a general FYI, it appears this ETF qualifies as a commission-free ETF under Vanguard's new no-fee expansion that went live today, despite it being partially leveraged.

Interestingly, though, it does not appear on the master list (https://personal.vanguard.com/pdf/etfcfl.pdf) of commission-free ETFs. I suspect it may just be because the ETF is fairly new - there are many other WisdomTree ETFs on the "approved" list.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by ThrustVectoring » Tue Aug 21, 2018 1:15 pm

BanditKing wrote:
Tue Aug 21, 2018 11:45 am
As a general FYI, it appears this ETF qualifies as a commission-free ETF under Vanguard's new no-fee expansion that went live today, despite it being partially leveraged.

Interestingly, though, it does not appear on the master list (https://personal.vanguard.com/pdf/etfcfl.pdf) of commission-free ETFs. I suspect it may just be because the ETF is fairly new - there are many other WisdomTree ETFs on the "approved" list.
I mean, it's leveraged, but honestly levering up short term treasuries is basically a riskier version of something super low risk, so that basically cancels out.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by BanditKing » Tue Aug 21, 2018 1:53 pm

ThrustVectoring wrote:
Tue Aug 21, 2018 1:15 pm
I mean, it's leveraged, but honestly levering up short term treasuries is basically a riskier version of something super low risk, so that basically cancels out.
Oh, I understand. Was just more of an interesting observation RE Vanguard's new ETF program. Nice that it's a commission-free trade as it is. :)

columbia
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by columbia » Tue Aug 21, 2018 3:33 pm

Has anyone (here) actually bought in to this fund?

aristotelian
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by aristotelian » Tue Aug 21, 2018 7:48 pm

Let's say I am investing $10K in this fund. The goal is to get $90K in stock and $1K leveraged 6X in Treasuries. Wouldn't it be simpler to invest $9K in Vanguard Total Stock and $1K in a 6X leveraged Treasury fund? Seems to me that what WT is really offering is the leverage component, but they are diluting the expenses by getting you to invest in their total stock bucket at the same time. They could accomplish the same thing by offering just the 6X leveraged Treasury fund, but they would have to charge a 2% expense ratio. Of course, nobody would buy that.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by nisiprius » Tue Aug 21, 2018 8:23 pm

Has anyone figured out whether this fund has the "information technology sector risk" that the prospectus warns about?
Information Technology Sector Risk. The Fund currently invests a significant portion of its assets in the information technology sector, and therefore the Fund’s performance could be negatively impacted by events affecting this sector. The information technology sector includes, for example, internet, semiconductor, software, hardware, and technology equipment companies. This sector can be significantly affected by, among other things, the supply and demand for specific products and services, the pace of technological development, and government regulation.
At the moment, Morningstar and the prospectus is showing a sector breakdown that is essentially that of the US market. It this fund layering sector bets on top of the 90/60 mechanism, or are they saying that the US stock market itself has "information technology sector risk?"

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Theoretical
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by Theoretical » Tue Aug 21, 2018 8:54 pm

They’re saying the latter.

For example, iShares IVV (S&P 500) has the same risk statement on page S-4 of the prospectus.

It’s fairly standard for even vanilla funds to include the sector risk warnings if any of the normal sectors in the fund could reasonably go above 25% weighting.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by hdas » Tue Aug 21, 2018 9:07 pm

The key question for most regarding this fund is how to allocate the 1/3 left. H

bgf
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by bgf » Tue Aug 21, 2018 9:29 pm

columbia wrote:
Tue Aug 21, 2018 3:33 pm
Has anyone (here) actually bought in to this fund?
it doesnt appear to be available through Merrill Edge...
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by NYC_Guy » Tue Aug 21, 2018 9:52 pm

Taylor Larimore wrote:
Wed Aug 08, 2018 7:35 pm
hdas wrote:
Wed Aug 08, 2018 4:36 pm
Excellent new addition:

https://www.wisdomtree.com/etfs/asset-allocation/ntsx

Expense Ratio: 0.2
hdas:

Jane Bryant Quinn, syndicated columnist and author of "Smart and Simple Financial Strategies" offers this good advice:
"You shouldn't buy anything too complex to explain to the average 12-year old."
Best wishes.
Taylor
Umm. I think the math and concepts are quite well suited for 12 year olds. It’s not calculus. Not even trig. More like Algebra I.

BanditKing
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by BanditKing » Tue Aug 21, 2018 10:26 pm

columbia wrote:
Tue Aug 21, 2018 3:33 pm
Has anyone (here) actually bought in to this fund?
I picked some up today as a routine ETF purchase in taxable. Not a lot - like $500 worth. In my AA calculator, I'm lumping it into the same category as I do Wellington, which has a similar equities/bond split.

Interested to see how it performs.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by JackoC » Tue Aug 21, 2018 10:50 pm

ThrustVectoring wrote:
Sat Aug 11, 2018 3:53 am

Honestly, you should probably just DIY it on the treasury futures contracts.
I agree there's not a lot of space in between where one understands this well enough to invest in a fund that does it, and understanding how to do it yourself and what exactly you are doing. Although, doing it yourself means rolling the various contracts every three months as they mature, not only fully understanding it. Also depending on your scale the treasury note contract sizes, $100k or $200k notional, might be unwieldy.

Doing it via a fund though, besides paying extra ER for something that actually is fairly simple, involves inevitable agency risk.

But if you did this by yourself, 90% of your money (in this strategy at least) in stocks is risky, that's obviously the biggest actual risk. Secondarily the magnified treasury position (aside from the mechanics of futures) could add risk. That would be true in a bad stock market period like a lot of 60's-80's period caused by bursts of unexpected inflation enough to hurt stocks, as well as obviously hurt nominal bonds. Although the magnified T position would mitigate stock risk in a 2008-9 crash rerun. The risk of futures mechanics per se would not be the big thing, assuming the investor really understands that, and if not should obviously not do it.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by ThrustVectoring » Tue Aug 21, 2018 11:33 pm

JackoC wrote:
Tue Aug 21, 2018 10:50 pm
ThrustVectoring wrote:
Sat Aug 11, 2018 3:53 am

Honestly, you should probably just DIY it on the treasury futures contracts.
I agree there's not a lot of space in between where one understands this well enough to invest in a fund that does it, and understanding how to do it yourself and what exactly you are doing. Although, doing it yourself means rolling the various contracts every three months as they mature, not only fully understanding it. Also depending on your scale the treasury note contract sizes, $100k or $200k notional, might be unwieldy.

Doing it via a fund though, besides paying extra ER for something that actually is fairly simple, involves inevitable agency risk.

But if you did this by yourself, 90% of your money (in this strategy at least) in stocks is risky, that's obviously the biggest actual risk. Secondarily the magnified treasury position (aside from the mechanics of futures) could add risk. That would be true in a bad stock market period like a lot of 60's-80's period caused by bursts of unexpected inflation enough to hurt stocks, as well as obviously hurt nominal bonds. Although the magnified T position would mitigate stock risk in a 2008-9 crash rerun. The risk of futures mechanics per se would not be the big thing, assuming the investor really understands that, and if not should obviously not do it.
Rolling the contract isn't a huge deal, set a calendar reminder for the day the market is expected to be halfway rolled onto the new contract and do it at some arbitrary point then. The contract sizes are kinda unwieldy, but honestly they're not all that bad. If the balance is low enough to make a contract awkwardly large, then your overall portfolio is small enough that it can afford to be somewhat over-levered. I'd be comfortable setting aside $10k to back an initial $200k notional 2-year treasury future contract, even if my long-run goal was to have 10x leverage on the 2-year futures contract.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Wed Aug 22, 2018 3:21 am

ThrustVectoring wrote:
Tue Aug 21, 2018 11:33 pm
JackoC wrote:
Tue Aug 21, 2018 10:50 pm
ThrustVectoring wrote:
Sat Aug 11, 2018 3:53 am

Honestly, you should probably just DIY it on the treasury futures contracts.
I agree there's not a lot of space in between where one understands this well enough to invest in a fund that does it, and understanding how to do it yourself and what exactly you are doing. Although, doing it yourself means rolling the various contracts every three months as they mature, not only fully understanding it. Also depending on your scale the treasury note contract sizes, $100k or $200k notional, might be unwieldy.

Doing it via a fund though, besides paying extra ER for something that actually is fairly simple, involves inevitable agency risk.

But if you did this by yourself, 90% of your money (in this strategy at least) in stocks is risky, that's obviously the biggest actual risk. Secondarily the magnified treasury position (aside from the mechanics of futures) could add risk. That would be true in a bad stock market period like a lot of 60's-80's period caused by bursts of unexpected inflation enough to hurt stocks, as well as obviously hurt nominal bonds. Although the magnified T position would mitigate stock risk in a 2008-9 crash rerun. The risk of futures mechanics per se would not be the big thing, assuming the investor really understands that, and if not should obviously not do it.
Rolling the contract isn't a huge deal, set a calendar reminder for the day the market is expected to be halfway rolled onto the new contract and do it at some arbitrary point then.
This Pace of the Roll Tool gives good insight into the timing I think.

https://institute.cmegroup.com/trading_tools
The contract sizes are kinda unwieldy, but honestly they're not all that bad. If the balance is low enough to make a contract awkwardly large, then your overall portfolio is small enough that it can afford to be somewhat over-levered. I'd be comfortable setting aside $10k to back an initial $200k notional 2-year treasury future contract, even if my long-run goal was to have 10x leverage on the 2-year futures contract.
Worst case is what Treasuries default say over an agreement not being able to be reached about the debt ceiling?

That is what worries me the most. Deficits are horrible when the other party is in power but fine when it’s yours. Not blaming either side so don’t take this as political comment, but we’d be remiss in risk management to ignore this real possibility.

Again, I’m not suggesting treasuries might collapse long term, but short term fluctuation (as the market overreacts) in such a scenario is something I think I’d need to be mentally ready for.

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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by nisiprius » Wed Aug 22, 2018 6:33 am

Theoretical wrote:
Tue Aug 21, 2018 8:54 pm
They’re saying the latter.

For example, iShares IVV (S&P 500) has the same risk statement on page S-4 of the prospectus.

It’s fairly standard for even vanilla funds to include the sector risk warnings if any of the normal sectors in the fund could reasonably go above 25% weighting.
Good ammunition for people who claim that cap-weighted S&P 500 and total market index funds are undiversified, then.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

JackoC
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by JackoC » Wed Aug 22, 2018 8:33 am

ThrustVectoring wrote:
Tue Aug 21, 2018 11:33 pm
JackoC wrote:
Tue Aug 21, 2018 10:50 pm
ThrustVectoring wrote:
Sat Aug 11, 2018 3:53 am

Honestly, you should probably just DIY it on the treasury futures contracts.
Although, doing it yourself means rolling the various contracts every three months as they mature, not only fully understanding it. Also depending on your scale the treasury note contract sizes, $100k or $200k notional, might be unwieldy.

Doing it via a fund though, besides paying extra ER for something that actually is fairly simple, involves inevitable agency risk.

But if you did this by yourself, 90% of your money (in this strategy at least) in stocks is risky, that's obviously the biggest actual risk.
Rolling the contract isn't a huge deal, set a calendar reminder for the day the market is expected to be halfway rolled onto the new contract and do it at some arbitrary point then.
I'm just noting that's an ongoing task. I don't personally think it's worth anywhere near ~.15% a year (is the ER here .20?, a straight equity ETF of course might offer .05, or less) to pay somebody to roll futures contracts for you at any scale where it makes sense to deal in the futures contract sizes. And futures commissions and bid-offer would come from the investor's pocket either way.

Again I think the elephant in the room on this particular fund is 90% equity. And it's interesting to me the mindset that would say 'OK 90% equity, everyone knows the stock market always goes up in the long run, but eek, leverage on bonds?!?' To my way of thinking 90% equity is the big risk here. Of course in DIY mode you could do 50/100 as easily as 90/60. Then it's back to the same general discussion as 'risk parity' strategies (which are generally lower equity/higher bond). Good in periods of negative equity-bond price correlation, could be painful in periods of positive correlation, which happen. Also, obviously, the carry of being long T note futures now is less positive than a few years ago (for general exposition: being long T note futures has essentially the same return as buying cash T notes and and financing them in the repo market, but the repo rate is a lot closer to 2+ yr T yields now than it was pretty recently).

clacy
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by clacy » Wed Aug 22, 2018 10:23 am

Very interesting. I'll be watching this ETF, but the worry with most of these niche ETF's is that the volume stays low and it never really takes off. So far this thing has averaged very low volume and I never want to be in low volume ETF's.

ThrustVectoring
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by ThrustVectoring » Wed Aug 22, 2018 12:47 pm

JackoC wrote:
Wed Aug 22, 2018 8:33 am
(for general exposition: being long T note futures has essentially the same return as buying cash T notes and and financing them in the repo market, but the repo rate is a lot closer to 2+ yr T yields now than it was pretty recently).
That's not exactly correct IIRC. Anyone who is long cash treasuries can sell them, go long treasury futures, and fund the treasury futures position with a 3-month T-bill that matures when you're obligated to re-buy the cash treasuries. That's the future/cash market arbitrage that I remember, so the future position generally finances at the 3-month T-bill rate, not the overnight repo rate.

Currently this is a difference of 1.90% for the secured overnight financing rate vs 2.08% for the three-month T-bill. Which is actually pretty relevant when then 2-year treasury rate is 2.61% - this is the difference between a spread of 71 and 53 basis points.

JackoC
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by JackoC » Wed Aug 22, 2018 3:14 pm

ThrustVectoring wrote:
Wed Aug 22, 2018 12:47 pm
JackoC wrote:
Wed Aug 22, 2018 8:33 am
(for general exposition: being long T note futures has essentially the same return as buying cash T notes and and financing them in the repo market, but the repo rate is a lot closer to 2+ yr T yields now than it was pretty recently).
That's not exactly correct IIRC. Anyone who is long cash treasuries can sell them, go long treasury futures, and fund the treasury futures position with a 3-month T-bill that matures when you're obligated to re-buy the cash treasuries. That's the future/cash market arbitrage that I remember, so the future position generally finances at the 3-month T-bill rate, not the overnight repo rate.

Currently this is a difference of 1.90% for the secured overnight financing rate vs 2.08% for the three-month T-bill. Which is actually pretty relevant when then 2-year treasury rate is 2.61% - this is the difference between a spread of 71 and 53 basis points.
I said 'financing them in the repo market' not 'financing them at the overnight repo rate'. :happy Repo rates have a term structure of overnight and term rates besides varying rates for particular treasury issues. But OK, 'it's essentially the same as buying cash T notes and financing them *to term* (of the contract settlement date) in the repo market.'

But if you want to quantify the actual economics of being long the futures v owning the treasuries, you want to calculate the 'implied repo rate' from the futures price and the prices of the securities eligible to deliver into the contract. The security with the highest 'implied repo rate' is the Cheapest to Deliver, and being long the contract is essentially like buying that CTD and financing it to term at that implied repo rate. Give or take some minor technical factors, that's what you are paying for the leverage. The T-bill rate to that term is a reasonable rough estimate but the implied repo rate can differ enough to matter if you're actually doing this and being exact about it.

bgf
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by bgf » Wed Aug 22, 2018 3:21 pm

JackoC wrote:
Wed Aug 22, 2018 3:14 pm
ThrustVectoring wrote:
Wed Aug 22, 2018 12:47 pm
JackoC wrote:
Wed Aug 22, 2018 8:33 am
(for general exposition: being long T note futures has essentially the same return as buying cash T notes and and financing them in the repo market, but the repo rate is a lot closer to 2+ yr T yields now than it was pretty recently).
That's not exactly correct IIRC. Anyone who is long cash treasuries can sell them, go long treasury futures, and fund the treasury futures position with a 3-month T-bill that matures when you're obligated to re-buy the cash treasuries. That's the future/cash market arbitrage that I remember, so the future position generally finances at the 3-month T-bill rate, not the overnight repo rate.

Currently this is a difference of 1.90% for the secured overnight financing rate vs 2.08% for the three-month T-bill. Which is actually pretty relevant when then 2-year treasury rate is 2.61% - this is the difference between a spread of 71 and 53 basis points.
I said 'financing them in the repo market' not 'financing them at the overnight repo rate'. :happy Repo rates have a term structure of overnight and term rates besides varying rates for particular treasury issues. But OK, 'it's essentially the same as buying cash T notes and financing them *to term* (of the contract settlement date) in the repo market.'

But if you want to quantify the actual economics of being long the futures v owning the treasuries, you want to calculate the 'implied repo rate' from the futures price and the prices of the securities eligible to deliver into the contract. The security with the highest 'implied repo rate' is the Cheapest to Deliver, and being long the contract is essentially like buying that CTD and financing it to term at that implied repo rate. Give or take some minor technical factors, that's what you are paying for the leverage. The T-bill rate to that term is a reasonable rough estimate but the implied repo rate can differ enough to matter if you're actually doing this and being exact about it.
WHOOOOOOOOOOSH

right over my head. i don't think, for me anyway, 0.20% is too much to pay in expense.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

JackoC
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by JackoC » Wed Aug 22, 2018 3:52 pm

bgf wrote:
Wed Aug 22, 2018 3:21 pm


WHOOOOOOOOOOSH

right over my head. i don't think, for me anyway, 0.20% is too much to pay in expense.
I was trying to avoid that, but at the other end of simplifying is nitpicking (though ThrustVectoring has a point that my initial simplification could be confusing).

However, paying somebody to do the trades doesn't actually eliminate the relevance of knowing what the implied borrowing rate is on the leverage, which the fund if like almost all other funds using leverage, doesn't tell you. It's not that the rate is so high as to make the whole thing unworkable, but just a quirk in the process of regulation which makes them 'reveal' all kind of less relevant or even confusing disclaimers and boilerplate, but not that. As ThrustVectoring said you can get an idea of that rate from the 3 month T-bill rate but that's not the actual answer, which the fund's trader's surely calculate. If borrowing to buy something one wants to know: at what rate?

typical.investor
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Wed Aug 22, 2018 5:30 pm

JackoC wrote:
Wed Aug 22, 2018 3:52 pm
bgf wrote:
Wed Aug 22, 2018 3:21 pm


WHOOOOOOOOOOSH

right over my head. i don't think, for me anyway, 0.20% is too much to pay in expense.
I was trying to avoid that, but at the other end of simplifying is nitpicking (though ThrustVectoring has a point that my initial simplification could be confusing).

However, paying somebody to do the trades doesn't actually eliminate the relevance of knowing what the implied borrowing rate is on the leverage, which the fund if like almost all other funds using leverage, doesn't tell you. It's not that the rate is so high as to make the whole thing unworkable, but just a quirk in the process of regulation which makes them 'reveal' all kind of less relevant or even confusing disclaimers and boilerplate, but not that. As ThrustVectoring said you can get an idea of that rate from the 3 month T-bill rate but that's not the actual answer, which the fund's trader's surely calculate. If borrowing to buy something one wants to know: at what rate?
I appreciate your discussion.

Precise borrowing rate aside, how much are you borrowing?

For 2 year treasuries (ZTU8), the contract size is 2000.0 and the last price is Last Price: 105.2750.

Does this mean I am borrowing 2000*105.2750? [since contract value at any one time is the futures price at that time for one unit -- multiplied by the number of units in the contract ] at roughly the thee month rate and that my yield would be the 2 yr rate on $200k?

That seems like the notational value though....

Is it 105.2750* 100 that I would be borrowing????

JackoC
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by JackoC » Thu Aug 23, 2018 10:34 am

typical.investor wrote:
Wed Aug 22, 2018 5:30 pm
I appreciate your discussion.

Precise borrowing rate aside, how much are you borrowing?

For 2 year treasuries (ZTU8), the contract size is 2000.0 and the last price is Last Price: 105.2750.

Does this mean I am borrowing 2000*105.2750? [since contract value at any one time is the futures price at that time for one unit -- multiplied by the number of units in the contract ] at roughly the thee month rate and that my yield would be the 2 yr rate on $200k?

That seems like the notational value though....

Is it 105.2750* 100 that I would be borrowing????
The 2yr note contract requires the 'short' to deliver to the 'long' $200,000 face value of one of a list of eligible issues. The short will deliver* the 'Cheapest to Deliver' (CTD) issue, determined by applying a conversion factor for each issue's price according to a formula. One issue will be most favorable to deliver. Now for the September 2 yr note contract, ticker ZTU8, it's the 2.5% coupon note maturing 6/30/20**. The conversion factor is .9426. Meaning the futures price of 105+27.5/32=105.86 equates to a price on the CTD issue of 99.81 (105.86*.9426) [edit to add] is the implied price of the issue for settlement on the contract date. You are implicitly borrowing enough to finance $200k of that issue at the [edit to add] price for normal settlement, ie the price one you'd see on a broker screen, (you'd add in the accrued interest to dot the i), but anyway basically $200k.

*doing a strategy such as being discussed you would never hold the contract until settlement, you'd sell the current one before that and buy the next one 3 months further out (brokers nowadays generally kick you out of the position if you forget to do that, you're not even allowed by them to accept physical delivery as retail investor). But the delivery mechanism affects the price and risk.
**not the benchmark 2 yr note, which is the 2.625% of 7/31/20. It's generally not. Per the vagaries of the formula that difference becomes more important with longer term note futures contracts. The current CTD on the Sep 5 yr note contract is a 4.3yr, on the traditional 10yr note contract ZN it's a 6.8 yr. Determining the CTD can have important implications as to the effective yield in a sloping yield curve, and the duration risk.

typical.investor
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Fri Aug 24, 2018 10:42 am

JackoC wrote:
Thu Aug 23, 2018 10:34 am
The 2yr note contract requires the 'short' to deliver to the 'long' $200,000 face value of one of a list of eligible issues. The short will deliver* the 'Cheapest to Deliver' (CTD) issue, determined by applying a conversion factor for each issue's price according to a formula. One issue will be most favorable to deliver. Now for the September 2 yr note contract, ticker ZTU8, it's the 2.5% coupon note maturing 6/30/20**. The conversion factor is .9426. Meaning the futures price of 105+27.5/32=105.86 equates to a price on the CTD issue of 99.81 (105.86*.9426) [edit to add] is the implied price of the issue for settlement on the contract date. You are implicitly borrowing enough to finance $200k of that issue at the [edit to add] price for normal settlement, ie the price one you'd see on a broker screen, (you'd add in the accrued interest to dot the i), but anyway basically $200k.
I see the conversion lookup on the CME group site, but where do figure out what the CTD currently is. Calculate it yourself?

JackoC wrote:
Thu Aug 23, 2018 10:34 am
*doing a strategy such as being discussed you would never hold the contract until settlement, you'd sell the current one before that and buy the next one 3 months further out (brokers nowadays generally kick you out of the position if you forget to do that, you're not even allowed by them to accept physical delivery as retail investor). But the delivery mechanism affects the price and risk.
**not the benchmark 2 yr note, which is the 2.625% of 7/31/20. It's generally not. Per the vagaries of the formula that difference becomes more important with longer term note futures contracts. The current CTD on the Sep 5 yr note contract is a 4.3yr, on the traditional 10yr note contract ZN it's a 6.8 yr. Determining the CTD can have important implications as to the effective yield in a sloping yield curve, and the duration risk.
So if the price on the ZTU8 CTD issue is 99.81, can that be plugged into a bond yield calculator such as:

(price) 99.81
(par) 100
(coupon) 2.5
(maturity) 2 [guess I should be more careful and look up the CTD date exactly]

That equates to a 2.599% YTM.

Part of me wants to think that if I am borrowing at the 3 month rate (around 2%) and earning 2.5%, that I should only yield the difference 0.5%. That's why I asked how much I would be financing.

JackoC
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by JackoC » Fri Aug 24, 2018 11:07 am

typical.investor wrote:
Fri Aug 24, 2018 10:42 am

1. I see the conversion lookup on the CME group site, but where do figure out what the CTD currently is. Calculate it yourself?

2. So if the price on the ZTU8 CTD issue is 99.81, can that be plugged into a bond yield calculator such as:

(price) 99.81
(par) 100
(coupon) 2.5
(maturity) 2

That equates to a 2.599% YTM.

Part of me wants to think that if I am borrowing at the 3 month rate (around 2%) and earning 2.5%, that I should only yield the difference 0.5%. That's why I asked how much I would be financing.
1. Their (CME) spreadsheets further allow you to calculate it but you can see it here:
http://cme.maxeler.com/tf?vendor=Reuters

2. Right, the carry on the 2yr contract now is roughly +.50% on the notional amount (the note isn't really a 2 yr, the borrowing rate isn't exactly 2%, but roughly).

typical.investor
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Sat Aug 25, 2018 9:46 am

JackoC wrote:
Fri Aug 24, 2018 11:07 am
2. Right, the carry on the 2yr contract now is roughly +.50% on the notional amount (the note isn't really a 2 yr, the borrowing rate isn't exactly 2%, but roughly).

Sorry if this has been answered before, but does the fund get a better financing rate?

A 90/10 portfolio would earn maybe .28% (depending on exact duration) (10% * 2.81%) on the fixed income if you held them directly.

If the fund has the same carry, even leveraged up to 6X you'd only yield maybe 0.48% (again not sure on the duration and this is just a very rough estimate assuming something between 5 and 10 years).

It seems like the 90/60 has the interest rate risk, but not the yield of 60% treasuries. Not even the yield of 40% treasuries.

Or does the WisdomTree 90/60 have a more favorable financing rate?

JackoC
Posts: 203
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by JackoC » Sat Aug 25, 2018 11:40 am

typical.investor wrote:
Sat Aug 25, 2018 9:46 am
JackoC wrote:
Fri Aug 24, 2018 11:07 am
2. Right, the carry on the 2yr contract now is roughly +.50% on the notional amount (the note isn't really a 2 yr, the borrowing rate isn't exactly 2%, but roughly).

Sorry if this has been answered before, but does the fund get a better financing rate?

A 90/10 portfolio would earn maybe .28% (depending on exact duration) (10% * 2.81%) on the fixed income if you held them directly.

If the fund has the same carry, even leveraged up to 6X you'd only yield maybe 0.48% (again not sure on the duration and this is just a very rough estimate assuming something between 5 and 10 years).

It seems like the 90/60 has the interest rate risk, but not the yield of 60% treasuries. Not even the yield of 40% treasuries.

Or does the WisdomTree 90/60 have a more favorable financing rate?
The fund does not get a materially better financing rate. Among the plus factors for DIY futures, *if* the investor decides leverage is appropriate, is you get the same effective financing terms as institutions do*. The fund's literature suggests it might use so called 'total return swaps' in lieu of futures but there's little likelihood that comes out to a lower implicit financing rate than futures.

Of course you make less return on $200k notional using say $33.3k of your own money to support a position in one 2 yr note contract** than you make on $200k using $200k of your own money buying the 2.5% note of 6/30/20, because you're using Other People's Money, implicitly. However .50%pa on $200k is 3%pa on the capital you're actually putting up, with effective duration of around 10.8 (~1.8 duration of the 6/30/20 note times 6). Buying the 30 yr bond with $33.3k of your own money you need to go to 20.5 duration to get (slightly below) 3%. That doesn't make the leveraged position in 2yr note a free lunch of course, because you also have risk of the implicit financing rate rising and squeezing out the ~.50% spread, and for large rate rises the duration of the 30yr is much less linear than the 2yr**.

One would have to consider all aspects, according to individual risk preference, as for anything else.

*the retail investor will likely pay higher commissions for the continual trades rolling over the futures contracts, if you include that in the effective financing rate. The retail investor might or might not pay more bid-offer, it's one market basically, the fund's trades are being executed by professionals but in bigger size. The fund's commission and bid-offer cost come out of the investor's pocket separately from the ER, only the difference in those costs in the fund's favor counts against the ER. That difference is not likely to be material relative to the ER, not counting the value of the investor's time. Previously somebody responded 'that's no problem', depends on the person.
**the actual margin requirement per contract would be~ $500, but you need much more capital to cover possible losses over a long period. The fund appears to use 6:1 leverage, 90% equity uses 90% of the capital, 60% bonds the other 10%. That would require a yield on the note ~12.5% to force you out of the position, assuming no profit/loss on carry in the meantime. However assuming as a stress test the 2yr and 30yr both went immediately to their all time high monthly close yields, 16.73% and 15.19% respectively in August 1981, you'd be down ~130% (and long since thrown out of the position if you hadn't added new capital) on 6* 2yr note v ~79% on the 30 yr, due to the greater convexity (greater non-linearity of duration with rate change) of the 30 yr. A 6*2yr loss catches up with a 1*30yr loss at ~6% upward parallel shift of the yield curve. For a 1% shift the 6*2yr loses ~10%, 1*30 yr ~17%, of your $33.3k.

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