Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

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parval
Posts: 137
Joined: Tue Oct 22, 2019 9:23 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by parval »

Hey folks, I thought treasury futures were taxed 60/40 for capital gains, did I remember that wrong? or IBKR report is displayed wrong, because all of my ZF/ZN realized losses are short term?
unemployed_pysicist
Posts: 107
Joined: Sat Oct 09, 2021 2:32 pm

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

Just to document the process, here is the next step, max carry maturity (zero coupon) after removing less than 2 years to maturity bonds:

Image

The resulting counts for each of the >2 maturity zeros to be the max carry:

Full sample, starting from 1961-06-14:

Code: Select all

2.00     11988
30.00     2521
2.75       586
3.00       468
2.25       457
2.50       456
3.50       402
3.75       323
3.25       321
4.00       277
5.25       231
4.25       219
4.50       206
7.50       183
5.50       181
7.25       169
6.75       152
8.00       151
7.75       151
5.00       150
4.75       147
5.75       139
7.00       133
6.00       124
6.50       122
9.75       115
6.25       108
11.75      106
12.25      105
8.25       104
12.50      101
8.50       100
11.50       96
10.00       90
10.75       86
10.50       82
12.00       82
10.25       73
8.75        66
9.50        63
11.00       62
9.00        60
11.25       59
13.00       54
9.25        51
12.75       50
13.25       29
13.75       24
14.25       24
13.50       18
14.75       17
15.50       16
15.25       14
24.50       14
14.00       13
17.50       12
21.50       11
15.75       11
23.25       11
14.50       10
25.75       10
18.00       10
16.50        9
26.50        9
24.00        9
16.75        9
15.00        8
24.75        8
21.00        8
17.75        8
20.75        7
20.25        6
24.25        6
23.50        6
17.00        5
22.50        5
16.25        5
27.75        5
23.00        5
22.75        5
27.50        4
25.25        4
20.00        4
26.00        4
19.25        4
19.75        4
25.50        4
28.00        4
22.00        4
18.50        4
18.25        3
22.25        3
28.50        3
25.00        3
29.50        3
16.00        3
29.75        3
21.75        3
21.25        2
29.25        2
26.25        2
18.75        2
27.00        2
23.75        2
26.75        1
19.00        1
19.50        1
27.25        1
From 1986:

Code: Select all

2.00     6110
2.75      478
3.00      392
3.50      360
2.50      339
3.75      297
2.25      290
3.25      278
4.00      268
5.25      225
4.25      207
4.50      195
30.00     193
7.50      179
5.50      176
7.25      169
8.00      151
7.75      149
6.75      149
4.75      138
5.00      136
5.75      133
7.00      130
6.00      122
6.50      119
9.75      112
12.25     105
6.25      105
11.75     105
12.50     101
8.50      100
8.25      100
11.50      96
10.00      90
10.75      85
12.00      82
10.50      81
10.25      73
8.75       66
9.50       63
11.00      62
9.00       59
11.25      59
13.00      54
9.25       51
12.75      50
13.25      29
13.75      23
14.25      23
13.50      18
15.50      16
14.75      16
15.25      14
23.25      11
15.75      11
25.75      10
21.50      10
14.00      10
24.00       9
16.75       9
17.50       9
14.50       9
26.50       9
15.00       8
18.00       7
24.75       7
24.50       7
23.50       6
24.25       6
23.00       5
22.50       5
20.00       4
19.25       4
25.25       4
22.75       4
20.25       4
22.00       4
26.00       4
16.25       4
25.50       4
21.00       4
19.75       3
20.75       3
17.75       3
25.00       3
22.25       3
18.25       3
18.50       3
21.75       2
21.25       2
16.50       2
17.00       2
26.25       2
23.75       2
16.00       2
27.00       1
18.75       1
19.00       1
27.50       1
28.00       1
27.25       1
The two year zero dominates, as expected. The 2 year maturity zero is the max carry maturity for about 50% of the time. 53% for the full sample and 45% since 1986.
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unemployed_pysicist
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

In case the zero coupon results are "good enough" for someone to start putting this into Portfolio Visualizer or something, here is the quarterly resampled max carry:

Code: Select all

1961-06-30     2.00
1961-09-30     2.00
1961-12-31     2.00
1962-03-31     2.00
1962-06-30     2.00
1962-09-30     2.75
1962-12-31     2.00
1963-03-31     2.00
1963-06-30     2.00
1963-09-30     2.00
1963-12-31     2.00
1964-03-31    30.00
1964-06-30     2.00
1964-09-30     2.00
1964-12-31     2.50
1965-03-31     2.00
1965-06-30     2.75
1965-09-30    16.50
1965-12-31    30.00
1966-03-31    30.00
1966-06-30     2.00
1966-09-30    30.00
1966-12-31    30.00
1967-03-31     2.75
1967-06-30     2.00
1967-09-30     2.00
1967-12-31     2.50
1968-03-31    30.00
1968-06-30    30.00
1968-09-30     3.00
1968-12-31    30.00
1969-03-31     8.25
1969-06-30     2.00
1969-09-30     2.00
1969-12-31     2.00
1970-03-31     2.00
1970-06-30     2.00
1970-09-30     2.00
1970-12-31     2.00
1971-03-31     2.00
1971-06-30     2.00
1971-09-30     2.00
1971-12-31     2.00
1972-03-31     2.00
1972-06-30     2.00
1972-09-30     2.00
1972-12-31     2.00
1973-03-31    30.00
1973-06-30     2.00
1973-09-30    30.00
1973-12-31    30.00
1974-03-31    30.00
1974-06-30    30.00
1974-09-30     2.00
1974-12-31    30.00
1975-03-31     2.00
1975-06-30     2.00
1975-09-30     2.00
1975-12-31     2.00
1976-03-31     2.00
1976-06-30     2.00
1976-09-30     2.00
1976-12-31     2.00
1977-03-31     2.00
1977-06-30     2.00
1977-09-30     2.00
1977-12-31     2.00
1978-03-31     2.00
1978-06-30     2.00
1978-09-30    30.00
1978-12-31    30.00
1979-03-31    30.00
1979-06-30    30.00
1979-09-30    30.00
1979-12-31    30.00
1980-03-31    30.00
1980-06-30     2.00
1980-09-30    14.50
1980-12-31    30.00
1981-03-31    30.00
1981-06-30    30.00
1981-09-30     2.00
1981-12-31     2.00
1982-03-31     2.00
1982-06-30     2.00
1982-09-30     2.00
1982-12-31     2.00
1983-03-31     2.00
1983-06-30     2.00
1983-09-30     2.00
1983-12-31     2.00
1984-03-31     2.00
1984-06-30     2.00
1984-09-30     2.00
1984-12-31     2.00
1985-03-31     2.00
1985-06-30     2.00
1985-09-30     2.00
1985-12-31     2.00
1986-03-31     2.00
1986-06-30     2.00
1986-09-30     2.00
1986-12-31     2.00
1987-03-31     2.00
1987-06-30     2.00
1987-09-30     2.00
1987-12-31     2.00
1988-03-31     2.00
1988-06-30     2.00
1988-09-30     2.00
1988-12-31     2.00
1989-03-31     2.00
1989-06-30     7.25
1989-09-30     5.25
1989-12-31     7.00
1990-03-31     2.00
1990-06-30     2.00
1990-09-30     2.00
1990-12-31     2.00
1991-03-31     2.00
1991-06-30     2.00
1991-09-30     2.00
1991-12-31     2.00
1992-03-31     2.00
1992-06-30     2.00
1992-09-30     2.00
1992-12-31     2.00
1993-03-31     2.50
1993-06-30     2.00
1993-09-30     2.00
1993-12-31     2.00
1994-03-31     2.00
1994-06-30     2.00
1994-09-30     2.00
1994-12-31     2.00
1995-03-31     2.00
1995-06-30     9.50
1995-09-30     2.00
1995-12-31     5.25
1996-03-31     2.00
1996-06-30     2.00
1996-09-30     2.00
1996-12-31     2.00
1997-03-31     2.00
1997-06-30     2.00
1997-09-30     2.00
1997-12-31     2.00
1998-03-31     2.00
1998-06-30     2.00
1998-09-30    12.50
1998-12-31    11.00
1999-03-31     2.00
1999-06-30     2.00
1999-09-30     2.00
1999-12-31     2.00
2000-03-31     2.00
2000-06-30     2.00
2000-09-30    10.75
2000-12-31    13.00
2001-03-31     6.00
2001-06-30     2.00
2001-09-30     3.00
2001-12-31     2.00
2002-03-31     2.00
2002-06-30     2.00
2002-09-30     5.00
2002-12-31     4.00
2003-03-31     3.75
2003-06-30     4.25
2003-09-30     3.75
2003-12-31     2.50
2004-03-31     3.25
2004-06-30     2.00
2004-09-30     2.00
2004-12-31     2.00
2005-03-31     2.00
2005-06-30     2.00
2005-09-30     2.00
2005-12-31    11.00
2006-03-31    10.50
2006-06-30    10.50
2006-09-30    13.00
2006-12-31    12.25
2007-03-31    12.00
2007-06-30     9.75
2007-09-30     7.50
2007-12-31     7.00
2008-03-31     6.50
2008-06-30     2.25
2008-09-30     5.25
2008-12-31     5.50
2009-03-31     5.75
2009-06-30     3.00
2009-09-30     3.00
2009-12-31     2.50
2010-03-31     3.25
2010-06-30     4.50
2010-09-30     6.00
2010-12-31     4.50
2011-03-31     3.50
2011-06-30     5.25
2011-09-30     6.50
2011-12-31     6.75
2012-03-31     6.75
2012-06-30     8.25
2012-09-30     8.75
2012-12-31     8.00
2013-03-31     8.00
2013-06-30     4.75
2013-09-30     5.00
2013-12-31     4.50
2014-03-31     3.75
2014-06-30     3.50
2014-09-30     2.75
2014-12-31     2.50
2015-03-31     3.00
2015-06-30     3.00
2015-09-30     2.50
2015-12-31     2.50
2016-03-31     4.50
2016-06-30     4.50
2016-09-30     3.75
2016-12-31     2.75
2017-03-31     3.25
2017-06-30     3.75
2017-09-30     3.25
2017-12-31     2.25
2018-03-31     2.00
2018-06-30     2.00
2018-09-30     2.00
2018-12-31    30.00
2019-03-31    30.00
2019-06-30    23.25
2019-09-30    25.00
2019-12-31    10.50
2020-03-31     8.25
2020-06-30    10.50
2020-09-30     9.75
2020-12-31     7.25
2021-03-31     5.00
2021-06-30     4.00
2021-09-30     3.50
2021-12-31     2.00
2022-03-31     2.00
2022-06-30     2.00
2022-09-30     2.00
Perhaps 2-3 year gets binned to VFISX, 4-6 year gets binned to VFITX, 7-10 year gets binned to IEF (not very many max carry data points in the 7-10 range until after 2000s), and anything higher gets binned to VUSTX or possibly even VEDTX for greater than 20 years (VEDTX is available after 2007).
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comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

unemployed_pysicist wrote: Mon Nov 14, 2022 2:22 pm In case the zero coupon results are "good enough" for someone to start putting this into Portfolio Visualizer or something, here is the quarterly resampled max carry:
...
Perhaps 2-3 year gets binned to VFISX, 4-6 year gets binned to VFITX, 7-10 year gets binned to IEF (not very many max carry data points in the 7-10 range until after 2000s), and anything higher gets binned to VUSTX or possibly even VEDTX for greater than 20 years (VEDTX is available after 2007).
It is possible to concatenate performance with custom rebalancing / portfolio switch dates in PV? If not, we need a quarterly data source. I think Simba is only yearly. Spreadsheet would be better anyways.
unemployed_pysicist
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

comeinvest wrote: Mon Nov 14, 2022 3:26 pm It is possible to concatenate performance with custom rebalancing / portfolio switch dates in PV? If not, we need a quarterly data source. I think Simba is only yearly. Spreadsheet would be better anyways.
I thought there was a simple way to switch assets in portfolio visualizer? I've never used that feature so I don't know for sure.

What do you mean by spreadsheet? Something like one column for the quarterly date, one column for the quarterly max carry maturity, one column for the assigned index fund corresponding to the max carry maturity (vfisx, vfitx, vustx, vedtx), one column for the quarterly return of the assigned index fund from the start date, one column for the 3 month Tbill, one column for excess return? Something like that?
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comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

unemployed_pysicist wrote: Mon Nov 14, 2022 4:26 pm
comeinvest wrote: Mon Nov 14, 2022 3:26 pm It is possible to concatenate performance with custom rebalancing / portfolio switch dates in PV? If not, we need a quarterly data source. I think Simba is only yearly. Spreadsheet would be better anyways.
I thought there was a simple way to switch assets in portfolio visualizer? I've never used that feature so I don't know for sure.

What do you mean by spreadsheet? Something like one column for the quarterly date, one column for the quarterly max carry maturity, one column for the assigned index fund corresponding to the max carry maturity (vfisx, vfitx, vustx, vedtx), one column for the quarterly return of the assigned index fund from the start date, one column for the 3 month Tbill, one column for excess return? Something like that?
I was just saying if we have a spreadsheet, it's better than PV because it's more customizable. I have not looked too much into data sources; I just started with simulations. I don't know if there is some quarterly data in Simba or elsewhere. I think Yahoo might have historical data for ETFs to download. At least free equities data is easier to come by than free futures data.
unemployed_pysicist
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

comeinvest wrote: Mon Nov 14, 2022 4:36 pm I think Yahoo might have historical data for ETFs to download. At least free equities data is easier to come by than free futures data.
Yes, mutual funds and etf data is generally very easy to get from yahoo. I think the data quality of VUSTX, VFITX, VEDTX on yahoo is quite good, have not checked VFISX yet.
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Poe22
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Poe22 »

Just stumbled upon this epic thread. Would anyone be kind enough to let me know what a "modified" HFEA portfolio might look like? As in: which funds to include, at which %?
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

Poe22 wrote: Tue Nov 15, 2022 8:50 am Just stumbled upon this epic thread. Would anyone be kind enough to let me know what a "modified" HFEA portfolio might look like? As in: which funds to include, at which %?
If you were to afford the time to actually read the thread after stumbling on it, you will find a myriad of implementations and example portfolios including rebalancing strategies, from skier and other contributors.
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millennialmillions
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by millennialmillions »

LazyOverthinker wrote: Mon Aug 22, 2022 7:40 pm
skierincolorado wrote: Mon Aug 22, 2022 6:18 pm Also thanks for the help on the futures box. I've been holding a futures box in my IRA for about a week now and feel much better about the cash drag situation ( even though it was well under 1k per year currently). It's good to know that cash drag will still be minimal even if rates and or account balance goes up. Assuming this continues to work.
I just bought my first futures box today as well thanks to comeinvest; I feel we should share notes/elaborate on the process for the benefit of any thread-lurkers.
Thanks comeinvest, skier, and lazyoverthinker for pointing out futures boxes as a way of reducing cash drag in IRAs. I wasn't able to find much detail on how to execute a futures box, just a couple posts in this thread and a couple in the Futures in IRA thread. I'm looking to clarify my understanding on how to implement, both so I can implement myself and add to the summary paper.

Edit: removed the steps and screenshot since I was incorrectly using American style options and don't want to confuse others.
Last edited by millennialmillions on Thu Nov 17, 2022 12:44 pm, edited 1 time in total.
rama13
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by rama13 »

I guess it's unlikely that anyone would exercise those options, but aren't those are American style that you gave in your example? Seems kinda risky, if so. I'm doing the European style ones.
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millennialmillions
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by millennialmillions »

rama13 wrote: Wed Nov 16, 2022 10:58 pm I guess it's unlikely that anyone would exercise those options, but aren't those are American style that you gave in your example? Seems kinda risky, if so. I'm doing the European style ones.
Great catch, thank you. How do I trade the European style options? Reading this FAQ from CME, it seems Dec 16 is the right date, but I'm not sure how to trade the European-style quarterly options in IBKR.

Edit: I'll just use the weekly or end-of-month contracts instead since those are only European style.
Last edited by millennialmillions on Thu Nov 17, 2022 12:54 pm, edited 1 time in total.
ToBeOrNot
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by ToBeOrNot »

Definitely need to make sure to use European style options. Using American options is how that poor soul bragging about box spreads blew up their account. Market Watch: 1RONYMAN.
unemployed_pysicist
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

Futures contracts and their IRRs for their respective CTDs at around 4pm EST today:

Code: Select all

cusip     contract_code	irr  	irr_minus_closest_bill_yield                                                     
91282CFN6         tuz22  4.684103                      0.746103
91282CDN8         tuh23  4.303028                      0.045028
91282CED9         tum23  4.434031                      0.094031
91282CFK2        3yrz22  5.747683                      1.809683
91282CBQ3        3yrh23  3.387073                     -0.872927
9128286L9        3yrm23  4.641397                      0.306397
91282CEC1         fvz22  4.352989                      0.417989
91282CET4         fvh23  4.720012                      0.465012
91282CFM8         fvm23  5.114053                      0.779053
91282CEV9         tyz22  4.963897                      1.095897
91282CFL0         tyh23  4.842081                      0.582081
912828Z94         tym23  4.039331                     -0.300669
912810PX0         usz22  5.275792                      1.405792
912810PX0         ush23  4.640686                      0.380686
912810QB7         usm23  5.014936                      0.674936
912810SA7         ulz22  3.553283                     -0.316717
912810SC3         ulh23  4.519291                      0.259291
912810SE9         ulm23  4.955952                      0.617952
The three year march contract still has near -1% spread to closest Tbill. There is now no time delta between the closest maturing Tbill and the Z3N march contract expiry (or less than 1 day.)

Edit: Here is the time delta between the closest maturing Tbill and futures contract expiration:

Code: Select all

cusip  	contract_code       irr      closest_bill_tdelta                                                   
91282CFN6         tuz22  4.684103   4 days 02:24:20.408328
91282CDN8         tuh23  4.303028   0 days 02:24:20.408328
91282CED9         tum23  4.434031   6 days 02:24:20.408328
91282CFK2        3yrz22  5.747683   4 days 02:24:20.408328
91282CBQ3        3yrh23  3.387073   0 days 02:24:20.408328
9128286L9        3yrm23  4.641397   6 days 02:24:20.408328
91282CEC1         fvz22  4.352989   4 days 02:24:20.408328
91282CET4         fvh23  4.720012   0 days 02:24:20.408328
91282CFM8         fvm23  5.114053   6 days 02:24:20.408328
91282CEV9         tyz22  4.963897   3 days 02:24:20.408328
91282CFL0         tyh23  4.842081   5 days 02:24:20.408328
912828Z94         tym23  4.039331  12 days 02:24:20.408328
912810PX0         usz22  5.275792   3 days 02:24:20.408328
912810PX0         ush23  4.640686   5 days 02:24:20.408328
912810QB7         usm23  5.014936  12 days 02:24:20.408328
912810SA7         ulz22  3.553283   3 days 02:24:20.408328
912810SC3         ulh23  4.519291   5 days 02:24:20.408328
912810SE9         ulm23  4.955952  12 days 02:24:20.408328
There is a Tbill maturing on or very close to the same date as the expiration of the March shorter duration futures contracts (2s, 3s, 5s).
Last edited by unemployed_pysicist on Sat Nov 19, 2022 8:07 am, edited 3 times in total.
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comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

unemployed_pysicist wrote: Fri Nov 18, 2022 4:35 pm CTDs and their respective IRRs at around 4pm EST today:

Code: Select all

cusip     contract_code	irr  	irr_minus_closest_bill_yield                                                     
91282CFN6         tuz22  4.684103                      0.746103
91282CDN8         tuh23  4.303028                      0.045028
91282CED9         tum23  4.434031                      0.094031
91282CFK2        3yrz22  5.747683                      1.809683
91282CBQ3        3yrh23  3.387073                     -0.872927
9128286L9        3yrm23  4.641397                      0.306397
91282CEC1         fvz22  4.352989                      0.417989
91282CET4         fvh23  4.720012                      0.465012
91282CFM8         fvm23  5.114053                      0.779053
91282CEV9         tyz22  4.963897                      1.095897
91282CFL0         tyh23  4.842081                      0.582081
912828Z94         tym23  4.039331                     -0.300669
912810PX0         usz22  5.275792                      1.405792
912810PX0         ush23  4.640686                      0.380686
912810QB7         usm23  5.014936                      0.674936
912810SA7         ulz22  3.553283                     -0.316717
912810SC3         ulh23  4.519291                      0.259291
912810SE9         ulm23  4.955952                      0.617952
The three year march contract still has near -1% spread to closest Tbill. There is now no time delta between the closest maturing Tbill and the Z3N march contract expiry (or less than 1 day.)
Thanks. I'm sure you mean those are the financing IRR of the futures contracts with respect to the CTDs, not the IRR of the CTDs, correct? It can be confusing, because financing rates and actual yields to maturity are about equal these days.
I think the numbers for the Dec expirations are not very meaningful, because of the fluctuations in T-bill yields under a month that I observed here: viewtopic.php?p=6967593#p6967593 , as well as the possible anomalies of T-bills with very low yields that was also discussed in that thread.
The June expirations have very little to no liquidity and high bid/ask spreads, right? So also not meaningful.
The numbers for the Mar expiration are concerning, because of both the high absolute amounts of some of them, and the high dispersion of the IRRs. Most of the IRRs that you are showing are higher than the assumptions that we made in this thread.
Please keep posting, so we can get to the grounds of this. Thanks again.
unemployed_pysicist
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

comeinvest wrote: Fri Nov 18, 2022 6:57 pm
unemployed_pysicist wrote: Fri Nov 18, 2022 4:35 pm CTDs and their respective IRRs at around 4pm EST today:
Thanks. I'm sure you mean those are the financing IRR of the futures contracts with respect to the CTDs, not the IRR of the CTDs, correct? It can be confusing, because financing rates and actual yields to maturity are about equal these days.
I think the numbers for the Dec expirations are not very meaningful, because of the fluctuations in T-bill yields under a month that I observed here: viewtopic.php?p=6967593#p6967593 , as well as the possible anomalies of T-bills with very low yields that was also discussed in that thread.
The June expirations have very little to no liquidity and high bid/ask spreads, right? So also not meaningful.
The numbers for the Mar expiration are concerning, because of both the high absolute amounts of some of them, and the high dispersion of the IRRs. Most of the IRRs that you are showing are higher than the assumptions that we made in this thread.
Please keep posting, so we can get to the grounds of this. Thanks again.
Yes, those are the IRRs of the futures contracts with respect to each CTD. I will edit my post to make this clear.

I would disregard the June contracts, as you say.

We are creeping closer to the roll period; Z3N March contract has been consistently "cheap" as far as I can tell. Curious how it will evolve as we near the end of november.
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comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

unemployed_pysicist wrote: Sat Nov 19, 2022 6:14 am
comeinvest wrote: Fri Nov 18, 2022 6:57 pm
unemployed_pysicist wrote: Fri Nov 18, 2022 4:35 pm CTDs and their respective IRRs at around 4pm EST today:
Thanks. I'm sure you mean those are the financing IRR of the futures contracts with respect to the CTDs, not the IRR of the CTDs, correct? It can be confusing, because financing rates and actual yields to maturity are about equal these days.
I think the numbers for the Dec expirations are not very meaningful, because of the fluctuations in T-bill yields under a month that I observed here: viewtopic.php?p=6967593#p6967593 , as well as the possible anomalies of T-bills with very low yields that was also discussed in that thread.
The June expirations have very little to no liquidity and high bid/ask spreads, right? So also not meaningful.
The numbers for the Mar expiration are concerning, because of both the high absolute amounts of some of them, and the high dispersion of the IRRs. Most of the IRRs that you are showing are higher than the assumptions that we made in this thread.
Please keep posting, so we can get to the grounds of this. Thanks again.
Yes, those are the IRRs of the futures contracts with respect to each CTD. I will edit my post to make this clear.

I would disregard the June contracts, as you say.

We are creeping closer to the roll period; Z3N March contract has been consistently "cheap" as far as I can tell. Curious how it will evolve as we near the end of november.
The high and varying IRR spreads look concerning. First mitigation step for me is to keep spreading my luck across at least 3 different contracts. I'm not sure however if any of your results are actionable. Due to limits of arbitrage especially for the retail investor in the area of short selling, I don't think the futures can be reasonably arbitraged with the treasuries. A relative positioning between the futures might be possible, but we don't know yet if the futures or the treasury bond market is "right", in the sense of being consistent in terms of relative valuations. Please keep posting your results.
taojaxx
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!

Post by taojaxx »

I really enjoy following this thread. Bunch of overthinking dudes landing up on the worst spot of the yield curve because, you know, "it worked over the last 20 years BAB EMH blah blah".
Glad I have someone on the other side of my trades.
No disrespect intended lol. Have fun losing money! Keep at it :)
Better lucky than smart.
comeinvest
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Re: !

Post by comeinvest »

taojaxx wrote: Sun Nov 20, 2022 1:01 am I really enjoy following this thread. Bunch of overthinking dudes landing up on the worst spot of the yield curve because, you know, "it worked over the last 20 years BAB EMH blah blah".
Glad I have someone on the other side of my trades.
No disrespect intended lol. Have fun losing money! Keep at it :)
I think none of the contributors to this thread claim to know what the future brings. We are trying to optimize our chances.
That you have an alternate view is not disturbing, but welcome. However, as you seem to be very convinced of your forecast of future interest rates and of your position on the yield curve, it would be nice if you took the chance to contribute something, enlighten us and share your view, which is the entire point of a forum.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

unemployed_pysicist wrote: Fri Nov 18, 2022 4:35 pm Futures contracts and their IRRs for their respective CTDs at around 4pm EST today:

Code: Select all

cusip     contract_code	irr  	irr_minus_closest_bill_yield                                                     
91282CFN6         tuz22  4.684103                      0.746103
91282CDN8         tuh23  4.303028                      0.045028
91282CED9         tum23  4.434031                      0.094031
91282CFK2        3yrz22  5.747683                      1.809683
91282CBQ3        3yrh23  3.387073                     -0.872927
9128286L9        3yrm23  4.641397                      0.306397
91282CEC1         fvz22  4.352989                      0.417989
91282CET4         fvh23  4.720012                      0.465012
91282CFM8         fvm23  5.114053                      0.779053
91282CEV9         tyz22  4.963897                      1.095897
91282CFL0         tyh23  4.842081                      0.582081
912828Z94         tym23  4.039331                     -0.300669
912810PX0         usz22  5.275792                      1.405792
912810PX0         ush23  4.640686                      0.380686
912810QB7         usm23  5.014936                      0.674936
912810SA7         ulz22  3.553283                     -0.316717
912810SC3         ulh23  4.519291                      0.259291
912810SE9         ulm23  4.955952                      0.617952
The three year march contract still has near -1% spread to closest Tbill. There is now no time delta between the closest maturing Tbill and the Z3N march contract expiry (or less than 1 day.)

Edit: Here is the time delta between the closest maturing Tbill and futures contract expiration:

Code: Select all

cusip  	contract_code       irr      closest_bill_tdelta                                                   
91282CFN6         tuz22  4.684103   4 days 02:24:20.408328
91282CDN8         tuh23  4.303028   0 days 02:24:20.408328
91282CED9         tum23  4.434031   6 days 02:24:20.408328
91282CFK2        3yrz22  5.747683   4 days 02:24:20.408328
91282CBQ3        3yrh23  3.387073   0 days 02:24:20.408328
9128286L9        3yrm23  4.641397   6 days 02:24:20.408328
91282CEC1         fvz22  4.352989   4 days 02:24:20.408328
91282CET4         fvh23  4.720012   0 days 02:24:20.408328
91282CFM8         fvm23  5.114053   6 days 02:24:20.408328
91282CEV9         tyz22  4.963897   3 days 02:24:20.408328
91282CFL0         tyh23  4.842081   5 days 02:24:20.408328
912828Z94         tym23  4.039331  12 days 02:24:20.408328
912810PX0         usz22  5.275792   3 days 02:24:20.408328
912810PX0         ush23  4.640686   5 days 02:24:20.408328
912810QB7         usm23  5.014936  12 days 02:24:20.408328
912810SA7         ulz22  3.553283   3 days 02:24:20.408328
912810SC3         ulh23  4.519291   5 days 02:24:20.408328
912810SE9         ulm23  4.955952  12 days 02:24:20.408328
There is a Tbill maturing on or very close to the same date as the expiration of the March shorter duration futures contracts (2s, 3s, 5s).
You accounted for the expected treasury coupon payments between the present and the futures expiration dates in your IRR calcs, right?
unemployed_pysicist
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

comeinvest wrote: Mon Nov 21, 2022 8:46 am
You accounted for the expected treasury coupon payments between the present and the futures expiration dates in your IRR calcs, right?
Expected coupon payments should be accounted for in the IRR calculations, but it is worth checking again.
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comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

unemployed_pysicist wrote: Mon Nov 21, 2022 10:27 am
comeinvest wrote: Mon Nov 21, 2022 8:46 am
You accounted for the expected treasury coupon payments between the present and the futures expiration dates in your IRR calcs, right?
Expected coupon payments should be accounted for in the IRR calculations, but it is worth checking again.
I think the treasury quotes on the treasury analytics page, e.g. "107-16.75", are clean prices without accrued coupon payments.
The cash price paid by the recipient (long futures position) is: Most recent settlement price×Conversion factor+Accrued interest
I learned this here: https://ealdrich.github.io/Teaching/Eco ... tures.html and here: https://faculty.fiu.edu/~dupoyetb/Finan ... s/Ch06.pdf
LazyOverthinker
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Re: !

Post by LazyOverthinker »

taojaxx wrote: Sun Nov 20, 2022 1:01 am I really enjoy following this thread. Bunch of overthinking dudes landing up on the worst spot of the yield curve because, you know, "it worked over the last 20 years BAB EMH blah blah".
Glad I have someone on the other side of my trades.
No disrespect intended lol. Have fun losing money! Keep at it :)
Literally the last post you made before this one was in a thread about being aggressive during bear markets: "Aggressive during Japanese 1989 bear market?"

I wish I had the confidence to be smug in one thread about a single event 30 years ago, and then go to another thread and criticize people for backtesting nearly 100 years! We get it, you know better than everyone else!

No disrespect intended lol :D
LazyOverthinker
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LazyOverthinker »

millennialmillions wrote: Wed Nov 16, 2022 10:34 pm
LazyOverthinker wrote: Mon Aug 22, 2022 7:40 pm
skierincolorado wrote: Mon Aug 22, 2022 6:18 pm Also thanks for the help on the futures box. I've been holding a futures box in my IRA for about a week now and feel much better about the cash drag situation ( even though it was well under 1k per year currently). It's good to know that cash drag will still be minimal even if rates and or account balance goes up. Assuming this continues to work.
I just bought my first futures box today as well thanks to comeinvest; I feel we should share notes/elaborate on the process for the benefit of any thread-lurkers.
Thanks comeinvest, skier, and lazyoverthinker for pointing out futures boxes as a way of reducing cash drag in IRAs. I wasn't able to find much detail on how to execute a futures box, just a couple posts in this thread and a couple in the Futures in IRA thread. I'm looking to clarify my understanding on how to implement, both so I can implement myself and add to the summary paper.

Edit: removed the steps and screenshot since I was incorrectly using American style options and don't want to confuse others.
I'd like to help solidify this part of the thread. Can you clarify what part of the instructions needs refining? If I recall correctly, comeinvest and I had two different processes to make FOPs spread. My process automatically created the box in European options, I haven't tried comeinvest's yet
Hfearless
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Hfearless »

Sorry for an ELI5 question, but just to be sure: we’re talking about buying a box that would eventually expire yielding slightly more money than it cost, and using that box as collateral for the futures, relying on the broker seeing that the box is worth a fixed amount of money?
unemployed_pysicist
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

Futures contracts and their IRRs for their respective CTDs at around 3:30pm EST today:

Code: Select all


cusip	  contract_code	   irr  		irr_minus_closest_bill_yield                                        
91282CFN6         tuz22  2.416551                     -1.501449
91282CDN8         tuh23  3.526162                     -0.728838
91282CED9         tum23  3.798632                     -0.559368
91282CFK2        3yrz22  3.665730                     -0.252270
91282CBQ3        3yrh23  2.403723                     -1.851277
9128286L9        3yrm23  3.851317                     -0.506683
91282CEC1         fvz22  2.465088                     -1.452912
91282CET4         fvh23  4.071366                     -0.183634
91282CFM8         fvm23  4.077538                     -0.280462
91282CEV9         tyz22  2.545115                     -1.344885
91282CFL0         tyh23  4.211758                     -0.043242
912828Z94         tym23  2.610464                     -1.747536
912810PW2         usz22  3.262992                     -0.627008
912810PX0         ush23  4.033460                     -0.221540
912810QB7         usm23  3.383560                     -0.974440
912810SA7         ulz22 -0.455900                     -4.345900
912810SC3         ulh23  3.609730                     -0.645270
912810SE9         ulm23  3.616590                     -0.741410
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comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

unemployed_pysicist wrote: Fri Nov 25, 2022 3:42 pm Futures contracts and their IRRs for their respective CTDs at around 3:30pm EST today:
You realize the markets were closed at that time? It was a short trading day.
Last edited by comeinvest on Sat Nov 26, 2022 2:16 am, edited 1 time in total.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

unemployed_pysicist wrote: Fri Nov 25, 2022 3:42 pm Futures contracts and their IRRs for their respective CTDs at around 3:30pm EST today:

Code: Select all


cusip	  contract_code	   irr  		irr_minus_closest_bill_yield                                        
91282CFN6         tuz22  2.416551                     -1.501449
91282CDN8         tuh23  3.526162                     -0.728838
91282CED9         tum23  3.798632                     -0.559368
91282CFK2        3yrz22  3.665730                     -0.252270
91282CBQ3        3yrh23  2.403723                     -1.851277
9128286L9        3yrm23  3.851317                     -0.506683
91282CEC1         fvz22  2.465088                     -1.452912
91282CET4         fvh23  4.071366                     -0.183634
91282CFM8         fvm23  4.077538                     -0.280462
91282CEV9         tyz22  2.545115                     -1.344885
91282CFL0         tyh23  4.211758                     -0.043242
912828Z94         tym23  2.610464                     -1.747536
912810PW2         usz22  3.262992                     -0.627008
912810PX0         ush23  4.033460                     -0.221540
912810QB7         usm23  3.383560                     -0.974440
912810SA7         ulz22 -0.455900                     -4.345900
912810SC3         ulh23  3.609730                     -0.645270
912810SE9         ulm23  3.616590                     -0.741410
But there must be a problem, right? Both Dec and Mar expirations are liquid right now. (At least during trading hours.) I don't think you can pocket an extra almost 2% p.a. over treasuries with some of the Mar expirations.
unemployed_pysicist
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

comeinvest wrote: Sat Nov 26, 2022 2:11 am
unemployed_pysicist wrote: Fri Nov 25, 2022 3:42 pm Futures contracts and their IRRs for their respective CTDs at around 3:30pm EST today:
You realize the markets were closed at that time? It was a short trading day.
No, I did not realize that. So the prices observed would be a couple hours out of date - I will check these again on Monday.
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TQQQ_FTW
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by TQQQ_FTW »

Hey guys new here and trying to get caught up. Has anyone thought about using Total Return Futures instead of ES. Seems like because you get dividends, might be closer to holding SPY.

https://www.cmegroup.com/markets/equiti ... ments.html
comeinvest
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SOFR futures

Post by comeinvest »

So I tried to explore the possibility of using SOFR futures strips instead of STT futures, as has been proposed a few times before in this thread and in the HFEA thread, and in the Newedge paper https://coexpartnersaig.files.wordpress ... -carry.pdf . (SOFR replaces LIBOR, although there are a few conceptual differences.) I think the idea is to have an exposure to the average of the instantaneous forward interest rates between now and 2 years from now, and to the term premia of the term structure of interest rate estimates, which in theory, because of non-arbitrage and expectations hypothesis, should be very close in risk and performance to buying an equivalent number (i.e. duration matched) of 2y (/ZT) treasury futures, but with less transactions and related cost (commissions and bid/ask spread every quarter), and possibly less exposure to short-term market anomalies and fluctuations of implied repo rates. Also refer to this post viewtopic.php?p=6880351#p6880351 and the cost comparison tool https://www.cmegroup.com/tools-informat ... lysis.html .

I tried to verify that the two implementations result in similar performance. The CDT of the current /ZT (Dec 2022 expiration) is the treasury maturing in Dec 2024. I therefore used the 7 SOFR futures contracts the last one being the Sep 2024 futures contract which expires in Dec 2024, and the "partial" Sep 2022 SOFR future which expires soon. Every 3-month SOFR futures contract has exactly $25 DV01 exposure. To get the same duration, I adjusted the number of /ZT contracts by 25 * 7.3 / 33.72, where 25 is the DV01 of a SOFR future, 7 is the number of SOFR futures used, 0.3 (or 0.27) is the approximate remaining time to maturity (to Dec 21 2022) of the "partial" Sep 2022 SOFR future in proportion to its original length, and 33.72 was the DV01 of /ZT on Friday. For comparison of the dollars gained/lost, I multiplied the futures price of the SOFR strip by its multiplier of 2500, and the futures price of the /ZT futures contract by its multiplier of 2000. I plotted each chart, and the difference between the two which is basically a telltale chart. Luckily the two individual charts look very similar at first glance, and each implementation loses roughly $30k during the time period contemplated. So far so good. But I was hoping to see approximately a flat line in the last chart, but it fluctuates by ca. +- $2k (0.2% in relation to the notional exposure of $1m) since the time when the /ZT became liquid, and by ca. +$4k (+0.4% of the notional exposure of $1m) in favor of the SOFR futures strip in relation to the /ZT futures since the roll period of the /ZT end of August. I know the exercise is just an approximation, but I was hoping that the results are closer. Please critique my approach. What could be the reason for the discrepancy? Should I use 2y zero coupon bond yields for comparison and if so, how?

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Last edited by comeinvest on Sat Nov 26, 2022 9:58 pm, edited 5 times in total.
Topic Author
skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

TQQQ_FTW wrote: Sat Nov 26, 2022 4:37 pm Hey guys new here and trying to get caught up. Has anyone thought about using Total Return Futures instead of ES. Seems like because you get dividends, might be closer to holding SPY.

https://www.cmegroup.com/markets/equiti ... ments.html
With ES you implicitly receive the dividend as well.
km91
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by km91 »

Are the ICE MSCI EAFE and EM futures reasonable options for intl exposure and to replace VEA and VWO? Volume seems to be sufficient but I noticed that some of the ICE MSCI index futures also have "Net Total Return" versions that don't appear to be as actively traded as the price return contracts. I'm looking to free up capital I currently have in VEA and VWO to redeploy into SCV and managed futures ETFs
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