That's enough for me in 2019

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Snowjob
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Re: That's enough for me in 2019

Post by Snowjob » Tue Aug 06, 2019 9:53 am

market timer wrote:
Tue Aug 06, 2019 9:05 am
Snowjob wrote:
Tue Aug 06, 2019 8:37 am
How much do you need to post (or expect to post given fluctuations) to maintain the short position and what qualifies as collateral? I assume the requirement must be generous in order to justify the leverage considering your large cash position in aggregate?
An ultra bond has a notional value of $185K. Collateral must be in cash and is pretty low compared to the notional value and volatility. You only need to post ~$3500 as collateral. It's the day-to-day volatility that requires a larger buffer. To get a sense of the volatility, the YTD range of the ultra contract has been $157-187K. I have a target cash buffer that I maintain to compensate for overnight volatility and have a second buffer kept in a money market account where I sweep excess cash. If the second buffer is exhausted, the third buffer is a short term bond ETF.
Makes sense, so you are obtaining quite a bit of leverage by doing this -- and yet levering a fairly "safe" portfolio". I like it.

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dogagility
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Re: That's enough for me in 2019

Post by dogagility » Tue Aug 06, 2019 4:36 pm

market timer wrote:
Tue Aug 06, 2019 7:42 am
dogagility wrote:
Tue Aug 06, 2019 4:22 am
Interesting. What is now your investment total return over different time horizons compared to a Boglehead strategy (buy and hold; three fund portfolio; annual rebalancing) with a similar risk profile? For the community, it would be beneficial if you posted the comparative returns too. Thanks in advance.
For me, it is really not a contest or about maximizing returns. Risk is not a scalar, it has many dimensions and we are more sensitive to different dimensions at different stages of life. I don't track returns, it just causes stress and fear of missing out.
So..., what is actionable in this thread without a comparison to a Boglehead investment practice?
Taking "risk" since 1995.

staustin
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Re: That's enough for me in 2019

Post by staustin » Tue Aug 06, 2019 4:52 pm

It's certainly been an interesting thread to follow. Market timer is clearly extremely intelligent with the time and expertise to take some unusual, but well thought out, positions. It's not for me but again I found it interesting and thought provoking.

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hdas
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Re: That's enough for me in 2019

Post by hdas » Thu Aug 15, 2019 6:39 am

market timer wrote:
Mon Aug 05, 2019 8:09 pm
Haven't updated since mid-May. Used the downturn in late May / early June to rotate from long term bonds to equities (mostly int'l). Used today's equity selloff and bond rally to do more of the same. Now have essentially locked in 30-year borrowing rates of 2.24% to buy int'l equities.

New allocation (+change since mid-May):
22% precious metals (+7%)
13% crude oil and oil majors (-2%)
-38% long term bonds (-48%)
10% US equities (+18%)
33% int'l equities (+25%)
60% cash (flat)
Your timing/money making skills are atrocious. On the bright side, you can write a good story. Good Luck :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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market timer
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Re: That's enough for me in 2019

Post by market timer » Thu Aug 15, 2019 7:26 am

hdas wrote:
Thu Aug 15, 2019 6:39 am
market timer wrote:
Mon Aug 05, 2019 8:09 pm
Haven't updated since mid-May. Used the downturn in late May / early June to rotate from long term bonds to equities (mostly int'l). Used today's equity selloff and bond rally to do more of the same. Now have essentially locked in 30-year borrowing rates of 2.24% to buy int'l equities.

New allocation (+change since mid-May):
22% precious metals (+7%)
13% crude oil and oil majors (-2%)
-38% long term bonds (-48%)
10% US equities (+18%)
33% int'l equities (+25%)
60% cash (flat)
Your timing/money making skills are atrocious. On the bright side, you can write a good story. Good Luck :greedy
The move in long term bonds has been astonishing. Fortunately, precious metals have largely offset losses from lower yields. I don't expect to short at the exact top, and still think borrowing at 2.24% for 30 years is a pretty sweet deal. Let's see how this looks in a year.

goblue100
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Re: That's enough for me in 2019

Post by goblue100 » Thu Aug 15, 2019 7:33 am

market timer wrote:
Mon Aug 05, 2019 8:09 pm
Haven't updated since mid-May. Used the downturn in late May / early June to rotate from long term bonds to equities (mostly int'l).
This would have more credibility if you had posted it in late May / early June. And if you sold long bonds in May and June you've missed out on some really nice bond returns over the last 2 months.

* I missed your post above.
The move in long term bonds has been astonishing.
I agree with this!
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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hdas
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Re: That's enough for me in 2019

Post by hdas » Thu Aug 15, 2019 10:18 am

market timer wrote:
Thu Aug 15, 2019 7:26 am
hdas wrote:
Thu Aug 15, 2019 6:39 am
Your timing/money making skills are atrocious. On the bright side, you can write a good story. Good Luck :greedy
The move in long term bonds has been astonishing. Fortunately, precious metals have largely offset losses from lower yields. I don't expect to short at the exact top, and still think borrowing at 2.24% for 30 years is a pretty sweet deal. Let's see how this looks in a year.
It's not just that, the issue is the overlay of conventional views with naive counter trend execution. There was a time many years ago when this worked ok, just like there was a time to benefit naively from serial correlation. But today's environment requires a lot more nuance. Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

Caduceus
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Re: That's enough for me in 2019

Post by Caduceus » Thu Aug 15, 2019 11:51 am

market timer wrote:
Thu Aug 15, 2019 7:26 am

The move in long term bonds has been astonishing. Fortunately, precious metals have largely offset losses from lower yields. I don't expect to short at the exact top, and still think borrowing at 2.24% for 30 years is a pretty sweet deal. Let's see how this looks in a year.
How does a retail investor structure a position that effectively borrows at 2.24% for 30 years? Can you explain exactly how to do this? Does it require rolling over positions at specified times (using options/futures?)? Or can investors short bonds directly? (I didn't realize brokerages allowed individual investors to do this)

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market timer
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Re: That's enough for me in 2019

Post by market timer » Thu Aug 15, 2019 8:38 pm

Caduceus wrote:
Thu Aug 15, 2019 11:51 am
market timer wrote:
Thu Aug 15, 2019 7:26 am

The move in long term bonds has been astonishing. Fortunately, precious metals have largely offset losses from lower yields. I don't expect to short at the exact top, and still think borrowing at 2.24% for 30 years is a pretty sweet deal. Let's see how this looks in a year.
How does a retail investor structure a position that effectively borrows at 2.24% for 30 years? Can you explain exactly how to do this? Does it require rolling over positions at specified times (using options/futures?)? Or can investors short bonds directly? (I didn't realize brokerages allowed individual investors to do this)
Investors can always choose the tenor at which they borrow. If you buy short term futures (equities, bonds, whatever), you are borrowing at something close to 3-month LIBOR to buy the asset. Let's say you'd rather borrow at a fixed rate for 5 years instead of a floating rate. Then you could short Treasuries of a comparable duration and adjust your position as your remaining term declines. In this post, Matto provided a helpful source of info on Treasury futures data: https://www.cmegroup.com/tools-informat ... ytics.html

Going back to the 5-year example, when you short a 5-year future, you are shorting a basket of Treasuries with similar maturities, and the person who is short the future can determine which bond in the basket is the one to deliver. Of course, this means the cheapest bond in the basket is what gets delivered at settlement, therefore the price of the future is determined largely by the cheapest-to-deliver (CTD) bond in the basket. Currently, the CTD bond in the 5-year basket is a bond maturing on 11/30/2023. So, really, the 5-year future has a maturity of around 4 years and 3 months, based on the CTD. By shorting the future, you are paying the mark-to-market change in the value of the 5-year bond (current yield: 1.46%) and receiving a floating rate that depends primarily on 3-month LIBOR, and is called implied repo rate (currently 2.00%). You're also short the delivery option, which is sometimes material.

Assuming that short overview of bond futures was clear, we can move ahead to duration hedging. Ultimately, thinking of your 5-year borrowing commitment as a liability, you want your futures hedge to have a similar mark-to-market response to interest rate movements as your borrowing commitment. This is best summarized by the DV01, which shows how much the future changes in value for a parallel 1 basis point move in interest rates across the yield curve. The CTD 5-year has a futures DV01 of $46.96 (futures DV01 is different from DV01 on the cash bond because you need to divide the cash bond by the Treasury Conversion Factor). This means if interest rates move up by 1 basis point (.01%), the futures price will decline by $46.96. If you borrowed a lump sum $100K for 5 years, at let's say 2%, then you could calculate the opportunity cost of locking in 2% if rates moved down to 1.99%. This is the DV01 of your loan. For example, if you borrowed $100K at 2% with all interest and principal due in 5 years, you'd owe $110,517 in 5 years (I used daily compounding assuming 360 days in a year). If interest rates moved down by 1 basis point, you could have borrowed an extra $50, i.e., $100,050 at 1.99%, and you'd have owed the same $110,517 in 5 years. The purpose of futures in this example is to simulate the mark-to-market behavior of a longer term loan, allowing you to borrow at short term rates and convert them to any tenor you like. So let's say nobody wants to offer you a 5-year loan under 2%. That's no problem. You can borrow at 3-month LIBOR using a variety of instruments--futures, options, leveraged ETFs--and swap those short term rates into a longer term fixed rate by shorting futures with the DV01 of your hypothetical 5-year loan. For example, if you really wanted $100K for 5 years, it turns out the current 5-year future has a DV01 very close to $50 (see above, it's $46.96). All you'd need to do is short a single 5-year future contract and then reevaluate each quarter when you roll.

Now let's say you want to borrow for 30 years. You can replace everything I said above about 5-year futures with ultra futures. If you want to borrow for 30 years, eventually 10 years will pass, and likewise your duration and DV01 will decline. During this time, you can adjust duration in a few ways: move down in tenor (e.g., from ultra to 30-year futures), cut back on the number of contracts you use to hedge, offset the futures with smaller long positions in ETFs like TLT. As long as the DV01 of your synthetic loan matches the DV01 of the loan you'd like to construct, and the maturity profiles are similar (i.e., it would be risky to hedge a 30-year liability using only 2-year futures), you are fine.
Last edited by market timer on Sat Aug 17, 2019 1:16 am, edited 1 time in total.

Caduceus
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Re: That's enough for me in 2019

Post by Caduceus » Fri Aug 16, 2019 2:48 pm

market timer wrote:
Thu Aug 15, 2019 8:38 pm

...

Now let's say you want to borrow for 30 years. You can replace everything I said above about 5-year futures with ultra futures. If you want to borrow for 30 years, eventually 10 years will pass, and likewise your duration and DV01 will decline. During this time, you can adjust duration in a few ways: move down in tenor (e.g., from ultra to 30-year futures), cut back on the number of contracts you use to hedge, offset the futures with smaller long positions in ETFs like TLT. As long as the DV01 of your synthetic loan matches the DV01 of the loan you'd like to construct, and the maturity profiles are similar (i.e., it would be risky to hedge a 30-year liability using only 2-year futures), you are fine.
Thanks, Market Timer, for taking the time to explain this to me! I appreciate it very much. I understand the theory (shorting bond futures is like selling the fixed rate and buying the variable rate). But I don't understand everything about the mechanics of trading it. What is the significance of the column stating "delivery date" under the "Cheapest to Deliver" section? Those all have dates in 2019 - I don't understand what they are referring to. Why do they also present the "On the Run" information and not just the CTD information - does the comparison reveal something important?

The 5 year future in your example has a price of 119 and the DV01 is 46.94. I still don't get what the DV01 is - is it a measure of dollar duration? But if the interest rate goes up by, say, 3%, 3 x 46.94 is more than 119 - how can the futures price be negative? (Or is it just re-set every day, as it is marked to market?)

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market timer
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Re: That's enough for me in 2019

Post by market timer » Fri Aug 16, 2019 8:19 pm

Caduceus wrote:
Fri Aug 16, 2019 2:48 pm
market timer wrote:
Thu Aug 15, 2019 8:38 pm

...

Now let's say you want to borrow for 30 years. You can replace everything I said above about 5-year futures with ultra futures. If you want to borrow for 30 years, eventually 10 years will pass, and likewise your duration and DV01 will decline. During this time, you can adjust duration in a few ways: move down in tenor (e.g., from ultra to 30-year futures), cut back on the number of contracts you use to hedge, offset the futures with smaller long positions in ETFs like TLT. As long as the DV01 of your synthetic loan matches the DV01 of the loan you'd like to construct, and the maturity profiles are similar (i.e., it would be risky to hedge a 30-year liability using only 2-year futures), you are fine.
Thanks, Market Timer, for taking the time to explain this to me! I appreciate it very much. I understand the theory (shorting bond futures is like selling the fixed rate and buying the variable rate). But I don't understand everything about the mechanics of trading it. What is the significance of the column stating "delivery date" under the "Cheapest to Deliver" section? Those all have dates in 2019 - I don't understand what they are referring to. Why do they also present the "On the Run" information and not just the CTD information - does the comparison reveal something important?

The 5 year future in your example has a price of 119 and the DV01 is 46.94. I still don't get what the DV01 is - is it a measure of dollar duration? But if the interest rate goes up by, say, 3%, 3 x 46.94 is more than 119 - how can the futures price be negative? (Or is it just re-set every day, as it is marked to market?)
Delivery date = last day the person short the future has to deliver the bond. In practice, retail investors will close or roll the contracts prior to delivery, so more relevant is the last trading date the broker allows for the future. You are looking at September 2019 futures, which is why the delivery date is in 2019.

The OTR info is provided as a reference. OTR bonds are the most recently issued bonds with the tenor of the future. The info is most relevant to futures market makers who track whether futures prices are deviating materially from OTR bonds. Personally, I assume the futures market is efficient enough for my objectives without comparing to OTR bonds.

DV01 is the change in value due to a single basis point move in rates, i.e., .01%. In your example, a 3% move is 300 basis points, so you'd multiply $46.94 x 300 = $14,082. The future has a notional value of $119K, so about a 12% loss in value. This makes intuitive sense, given the duration is approximately 4 years and you are increasing rates by 3%. However, in reality, the DV01 changes as you change rates--this is called convexity. Therefore, the linear approximation starts to break down for very large moves in rates.

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hdas
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Re: That's enough for me in 2019

Post by hdas » Wed Aug 28, 2019 9:30 am

market timer wrote:
Thu Aug 15, 2019 7:26 am
hdas wrote:
Thu Aug 15, 2019 6:39 am
market timer wrote:
Mon Aug 05, 2019 8:09 pm
Haven't updated since mid-May. Used the downturn in late May / early June to rotate from long term bonds to equities (mostly int'l). Used today's equity selloff and bond rally to do more of the same. Now have essentially locked in 30-year borrowing rates of 2.24% to buy int'l equities.

New allocation (+change since mid-May):
22% precious metals (+7%)
13% crude oil and oil majors (-2%)
-38% long term bonds (-48%)
10% US equities (+18%)
33% int'l equities (+25%)
60% cash (flat)
Your timing/money making skills are atrocious. On the bright side, you can write a good story. Good Luck :greedy
The move in long term bonds has been astonishing. Fortunately, precious metals have largely offset losses from lower yields. I don't expect to short at the exact top, and still think borrowing at 2.24% for 30 years is a pretty sweet deal. Let's see how this looks in a year.
This morning I couldn't take it anymore. I sold 5 Dec Ultras @ 200. Hopefully you have been trading your position around so it's not just a gash of 15 big points against you. Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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market timer
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Re: That's enough for me in 2019

Post by market timer » Wed Aug 28, 2019 10:38 am

hdas wrote:
Wed Aug 28, 2019 9:30 am
This morning I couldn't take it anymore. I sold 5 Dec Ultras @ 200. Hopefully you have been trading your position around so it's not just a gash of 15 big points against you. Cheers :greedy
Nice trade. I added slightly an hour ago, a single future, to my short position at 199'28. While I have traded around a little, I've been on the wrong side of the move most of the way from 175 to 200. Precious metals have offset most of the loss, so overall I'm down 2% from my highs. The current level of global yields feels like insanity to me, but perhaps the rules of the game will change and it will all make sense later.

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hdas
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Re: That's enough for me in 2019

Post by hdas » Mon Sep 09, 2019 11:57 am

market timer wrote:
Wed Aug 28, 2019 10:38 am
hdas wrote:
Wed Aug 28, 2019 9:30 am
This morning I couldn't take it anymore. I sold 5 Dec Ultras @ 200. Hopefully you have been trading your position around so it's not just a gash of 15 big points against you. Cheers :greedy
Nice trade. I added slightly an hour ago, a single future, to my short position at 199'28. While I have traded around a little, I've been on the wrong side of the move most of the way from 175 to 200. Precious metals have offset most of the loss, so overall I'm down 2% from my highs. The current level of global yields feels like insanity to me, but perhaps the rules of the game will change and it will all make sense later.
Im out of short Ultras @193-00 this morning. However my retirement portfolio is still 20% long term bonds, the only thing I did there was:

>> Rebalance to equities in August (to keep weights in line after the massive move)
>> Switch from EDV to the more vanilla VGLT (lower duration)

I suspect LTT will be a drag in my portfolio, hopefully the occasional trade in futures + small caps (value) and international compensate somewhat.

Good Luck :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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market timer
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Re: That's enough for me in 2019

Post by market timer » Thu Sep 12, 2019 7:52 pm

hdas wrote:
Mon Sep 09, 2019 11:57 am
Im out of short Ultras @193-00 this morning.
That's a nice $35K gain (but could have been over $60K if you waited a bit longer...)

I'm also out of my bond short and back to hibernation mode.

New allocation (+change since mid-August):
22% precious metals (flat)
13% crude oil and oil majors (flat)
10% long term bonds (+48%)
-10% US equities (-20%)
30% int'l equities (-3%)
35% cash (-25%)

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dmcmahon
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Re: That's enough for me in 2019

Post by dmcmahon » Fri Nov 08, 2019 12:20 am

market timer wrote:
Thu Sep 12, 2019 7:52 pm
hdas wrote:
Mon Sep 09, 2019 11:57 am
Im out of short Ultras @193-00 this morning.
That's a nice $35K gain (but could have been over $60K if you waited a bit longer...)

I'm also out of my bond short and back to hibernation mode.

New allocation (+change since mid-August):
22% precious metals (flat)
13% crude oil and oil majors (flat)
10% long term bonds (+48%)
-10% US equities (-20%)
30% int'l equities (-3%)
35% cash (-25%)

Maybe I’m misreading it but how can you be down 25% in cash? Is it just accumulating losses from closed positions?

Dudley
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Re: That's enough for me in 2019

Post by Dudley » Fri Nov 08, 2019 7:00 pm

dmcmahon wrote:
Fri Nov 08, 2019 12:20 am
market timer wrote:
Thu Sep 12, 2019 7:52 pm
hdas wrote:
Mon Sep 09, 2019 11:57 am
Im out of short Ultras @193-00 this morning.
That's a nice $35K gain (but could have been over $60K if you waited a bit longer...)

I'm also out of my bond short and back to hibernation mode.

New allocation (+change since mid-August):
22% precious metals (flat)
13% crude oil and oil majors (flat)
10% long term bonds (+48%)
-10% US equities (-20%)
30% int'l equities (-3%)
35% cash (-25%)

Maybe I’m misreading it but how can you be down 25% in cash? Is it just accumulating losses from closed positions?
I understand that MT went from 60% cash to 35% cash - i.e. change in allocation of 25 percentage points.

CheepSkate
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Re: That's enough for me in 2019

Post by CheepSkate » Mon Nov 11, 2019 11:49 am

@market timer

What do you think about the portfolio I describe here? viewtopic.php?f=10&t=294506

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