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Fixed Income Ideas for 2010


arbitragr
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Although this is not a company based idea, it's still an idea with high probability and conviction.

 

Thesis: The Fed will start to raise rates sometime this year or early 2011.

 

How you can take advantage of this: shorting long term bonds.

Ways to do this; the following instruments will allow you to short long term Treasury bonds:

- IEF --> iShares Barclays 7-10 Year Treasury

- TLT --> iShares Barclays 20+ Year Treas Bond

- TLH -->iShares Barclays 10-20 Year Treasury Bd

- 10 year bond futures: http://www.cmegroup.com/trading/interest-rates/us-treasury/10-year-us-treasury-note_contract_specifications.html ("ZN" for IB)

 

 

Watch the unemployment numbers. Bill Gross stated most recently that the yield curve will start to steepen as unemployment decreases.

 

 

 

 

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  • 4 weeks later...

I would rather wait for the thesis to materialize in fact first and then buy the short-term bonds yielding the higher interest rate.

 

Unfortunately the thesis is already priced in by now ... looking at the moves on Good Friday (I don't think the Fed would raise above 1% any time soon). There's still opportunity, however the risk is higher ... or in traditional value investor parlance ... the margin of saftey is smaller.

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Julian Robertson and Francis Chou have both talked about hedging against a raise in Treasury rates:

 

Juilian: The former hedge-fund manager has been buying "curve caps," an investment that acts like leveraged put options, on long-term government bonds, he said today in an interview with Bloomberg

Television. "They would insure us in the event of massive rate increases," Robertson said.

 

Chou: "...we wonder what financial instruments we can use that will protect us if inflation takes hold. We want an instrument similar to an insurance policy whereby the most we could lose is the amount of premium we pay upfront but get all the upside if the interest rate rises. We have identified two such instruments: Constant Maturity Swap Rate Caps (CMS RC) and Constant Maturity Swap Curve Caps (CMS CC).

 

Comments.

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Julian Robertson and Francis Chou have both talked about hedging against a raise in Treasury rates:

 

Juilian: The former hedge-fund manager has been buying "curve caps," an investment that acts like leveraged put options, on long-term government bonds, he said today in an interview with Bloomberg

Television. "They would insure us in the event of massive rate increases," Robertson said.

 

Chou: "...we wonder what financial instruments we can use that will protect us if inflation takes hold. We want an instrument similar to an insurance policy whereby the most we could lose is the amount of premium we pay upfront but get all the upside if the interest rate rises. We have identified two such instruments: Constant Maturity Swap Rate Caps (CMS RC) and Constant Maturity Swap Curve Caps (CMS CC).

 

Comments.

 

I see that Francis' comments above are from the 2009 semi-annual report.  However, his 2009 annual report states that his funds did not purchase any of these Constant Maturity Swaps in 2009.  I would be interested to hear more.

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