Posts Tagged ‘Tlt’
Long Term Treasuries Remain an Effective Portfolio Hedge
Tuesday, March 26th, 2013
by Sober Look
With all the talk of the so-called Great Rotation, evidence points to investors still pumping billions into fixed income. And in spite of a fairly broad conviction that rates will be rising in the near future, investment portfolios are loaded with treasuries. Demand for US government paper continues to be strong in spite of the worst risk/return profile in decades (see post) and implied real yields deep in the negative territory (see post).
The obvious explanation is the public sector purchases by the Fed as well as other nations with significant dollar reserves. Traders continue to call the 10-year treasury the “widow-maker”, given how painful it has been to short that paper. Nobody wants to get in front of the freight train in the chart below.
Securities held outright by the US Federal Reserve (source: FRB)
But there is another reason. As investors move into equities while market indices hit new records, investors need an effective hedge. And over the past few years, long-dated treasuries have delivered precisely that. As discussed in this post, the right mix of treasuries with equities dramatically reduced the daily volatility of the portfolio. That quality of longer dated treasuries persists through today. The anti-correlation between the Barclays Long U.S. Treasury Index and the S&P500 index remains quite strong (-0.7).
Daily returns, 90 day rolling window
What’s particularly interesting about long-dated treasuries as a hedge is that the anti-correlation increases during periods of stress in the financial markets. In fact the hedge effectiveness was the strongest during the Italy fears flareup in the fall of 2011, followed by another dip last summer when Spain was in the crosshairs (keep in mind the chart above shows correlation over the previous 90 days). Very few hedging instruments have the “optionality” that kicks in at the time when one really needs it. Equity options and credit instruments (such as CDX) were not nearly as effective, particularly given the cost of decay/negative carry.
Investors are therefore willing to pay the premium of negative real rates and limited upside of treasuries in order to minimize portfolio volatility. It’s unclear if this relationship will hold or ultimately revert to historical levels. For now however, as Europe continues to spook investors who are piling into equities, treasuries remain in demand as an effective hedge.
Copyright © SoberLook.com
Tags: long bonds, soberlook, Tlt, Treasuries
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Bond Model: Sell Signal
Sunday, July 15th, 2012
by Guy Lerner, The Technical Take
Our bond model has issued a sell signal.
The bond model is based upon intermarket variables including inputs from commodities and utilities. The model first issued a buy signal on March 30, 2012. Since that time the Vanguard Total Bond Market Fund (symbol: BND) is up 1.9%. This ETF also closed at a new all time high on Friday. The i-Shares Lehman 20 + Year Treasury Bond Fund (symbol: TLT) is up 15% since March 30, 2012. The out performance of TLT is thought to be due to Operation Twist, as the Federal Reserve has been actively buying at the long end of the yield curve to push down interest rates. From March 30, 2012 to July 14, 2012, the SP500 loss 3.7%.
It has been my contention that the buy signal back in March was an early sign of economic weakness. This has turned out to be the case over the past 3 months as important data inputs, like ISM and unemployment, have been softer than expected. I don’t believe we are in recession (personal data), and at best, the US economy has stabilized with growth being below trend.
From a technical perspective, TLT looks like one of the best charts in my Chart Book. See figure 1, a weekly chart. Price must remain above the 128.52 key pivot point (support level) to avoid being a double top. Considering that our fundamental model has issued a sell signal, I would suspect TLT will struggle going forward.
Figure 1. TLT/ weekly
Copyright © The Technical Take
Tags: Bnd, Bond Fund, Bond Market, Contention, Data Inputs, Economic Weakness, ETF, Federal Reserve, Fund Symbol, Fundamental Model, Guy Lerner, I Shares, Lehman, Personal Data, Pivot Point, S&P500, Technical Perspective, Tlt, Year Treasury Bond, Yield Curve
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How Many Times Have We Heard That This is the Death of Bonds?
Friday, June 1st, 2012
by Guy Lerner, The Technical Take
I know they don’t move much, but in these turbulent times, just getting your principal back from an investment is a winning proposition. I have been bullish on bonds since March 30, 2012, and at the time, I suggested that this was an early sign of economic weakness, and on April 23 I wrote: “A topping equity market appears to be a sign of an economy that has peaked as well. This has been heralded by strength in bonds. Most likely, this is signaling further quantitative easing as the Federal Reserve intervenes in the bond market to prop up the economy and the equity markets.“
So fast forward to this week, and we note the following. The calls for the death of bonds has been pre-mature. Once again! How many times have we heard this over the past several years? Yes, they are boring, and yes, the market is very distorted courtesy of the Federal Reserve. But since April 30, the Vanguard Total Bond Market ETF (symbol: BND) is up 1.42% while the SP500 is down nearly 7%. The i-Shares Lehman 20 + Year Treasury Bond Fund (symbol: TLT) is up nearly 13% in this time period. Of course, hindsight being nearly 20/20, this suggests the Fed is continuing its purchases at the long end of the curve, and in all likelihood, the next round of quantitative easing will target these maturities as well.
For the record, figure 1 is a weekly chart of the TLT. Note the breakout to new all time highs. Even to the equity bulls this must mean something. Right?
Figure 1. TLT/ weekly
Copyright © The Technical Take
Tags: All Time Highs, Bnd, Bond Fund, Bond Market, Breakout, Economic Weakness, ETF, ETFs, Federal Reserve, Figure 1, Fund Symbol, Guy Lerner, Hindsight, I Shares, Lehman, Likelihood, Maturities, S&P500, Tlt, Turbulent Times, Vanguard, Year Treasury Bond
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Volatile or Not? (Tchir)
Sunday, April 22nd, 2012
From Peter Tchir of TF Market Advisors
Volatile or Not?
It is strange to start a weekly update and not be sure whether the week was volatile or not. North American stock indices ranged from -0.4% for Nasdaq to 0.6% for the S&P. Not much to look at there.
U.S. fixed income finished with small weekly gains. The 10 year treasury was 2 bps better. Fixed income ETF’s like TIP, TLT, LQD, HYG, JNK, and MUB all had small gains. Even the CDS indices, IG18, and the underperforming HY18 saw some small spread tightening over the course of the week.
Looking at Europe and we start to see some more volatility and divergence. The DAX was up 2.5% will the IBEX was down 2.9%. Spanish bond yields were mixed to better on the week, but Italian yields were worse. In a week of obvious attempts by governments and central banks and the IMF to calm markets, they had limited success with the smaller and more easily manipulated Spanish bond market, and failed in Italy. One scary undertone developing in the market is the concern about France and the potential impact of the French election. French 10 year yields moved 14 bps, and it wasn’t because the situation was improving, because German 10 year yields moved 3 tighter on the week. Germany continues to have a flight to quality bid, but France, not so much.
Maybe it is the activity in Europe that made the markets feel more volatile than the weekly changes show. Or maybe it was that the futures traded in an almost 3% range – from 1,359 to 1,390 with several 0.5% swings during the course of most days. Market darling Apple isn’t helping calm the market either. That can reverse on a moment’s notice, or a great earnings release, but the momentum that was dragging more and more hedge funds into the trade, is now working in reverse as stop losses are being triggered.
So often lately, the bulls are able to point to a decent tape in face of weak data and no stimulus, and this week ended with the opposite. Bulls will be nervous that decent earnings and a mega-plan from the IMF failed to provide strength to the market.
So, it was a strange week that was more volatile than the weekly changes show, and where some real cracks are being exposed.
Politicians and the Markets
In a week where the Birkin wielding head of the IMF went from G-20 delegation to delegation asking for them to commit their taxpayer’s money to another illusory firewall, it is important to focus on what was accomplished and what wasn’t.
By all accounts, the IMF has received commitments to increase the “firewall” by some amount, possibly as much as $500 billion. The politicians expect the markets to be excited about this “heroic” effort and the guarantee that no debt problem is too big that it can’t be solved with more debt. In spite of the headlines, I’m being asked
How will the countries honor their commitments?
Where will the money come from? Especially the European portion?
How would the money be used? For countries? For banks?
If commitments made in 2010 haven’t been approved, what good are these commitments?
What does this do to help the countries that are in trouble? Why does the IMF think it is safe to lend when real investors won’t lend?
The list is long, but is also accurate.
The entire IMF Firewall is being run as though it was an election. The leaders use the same slogans over and over. They say the money is needed to avoid calamity. They say the money will help. No evidence of either is provided, but who needs evidence when you are just running a campaign. So they campaigned, and in their view, they “won” the election, by getting these commitments.
That is the big disconnect. Politicians are sitting around Washington convinced that they have won. They fought a hard campaign to convince people that the Firewall was needed and would be good, and they got the job done. What they haven’t done, is seen how the market will react.
Unlike a real election, the market doesn’t give the winner a free pass for a certain amount of time. You haven’t won until the next election, you have merely won until the market tests your resolve.
That test will come quickly, quite likely this week. Markets will likely put pressure on Spanish and Italian yields, and possibly French yields depending on the election results. Nothing about the firewall changes a thing about the current situation these countries find themselves in. That is the key. If the firewall actually did something for these countries, we might be able to stage a strong rally, but the firewall doesn’t have an immediate impact. The firewall just ensures that these countries can borrow more money. That when the markets shut down on their ability to borrow, the IMF will lend to them. Your best hope as a current lender, is to hope you own short enough dated bonds that the IMF is still being generous and lending to the country to pay you back, rather than having gone into PSI mode.
Spain and Italy need to reduce the current interest burden, the total debt, make long term adjustments that while technically austerity, can have minimal near term impact, and they need to embark on some growth policies. A debt restructuring can accomplish the first two items. Policy and some IMF money can help on the all important growth issue. Without some form of PSI, the firewall at best will shift who countries owe money to, and at worst will discourage banks from lending to anyone other than sovereigns.
The markets will test the resolve of the EU, ECB, and IMF this week. They will see how readily “commitments” turn into “actions”. Once again, the smug victory speeches being made by the politicians are likely to look very wrong, and possibly before they have even finished their victory tour.
Last chance to QE?
I think we have one group within the Fed that is desperate to do QE and wants to do it now. There is another group that believes the economy should be left alone, unless the data deteriorates significantly. As we head towards the election in November, the hurdle of what constitutes “weak” economic data will increase. Right now, Benyellen might be able to argue “only” 120,000 NFP jobs is enough to launch QE. I don’t think they would have a chance of launching in August with NFP numbers like that.
So, Benyellen will push hard at this meeting. I think they will still face too much resistance. It is only one bad NFP number and 2 bad “initial claims” numbers. Not enough for the last defenders of anything resembling a free market at the Fed. Housing has been weak too, but again, permits were up, and although not bouncing, there does seem to be some stability returning to the housing market.
I don’t expect QE this week. I think the statement will be slightly more dovish than the last one, but that is priced in as the market does often seem to take the “bad news” as good news path. Realistically, the next meeting is the most likely one to see QE announced since it would only take a few more data items confirming recent ones to let Benyellen railroad the rest into one more round.
Earnings, just how good?
I was frustrated and disappointed with BAC and MS. They aren’t the only ones (GS and C did accounted for things similarly), but for whatever reason, they caught my eye, and convince me that this is what is wrong with the market.
Last year, when DVA and FVO were big positives, those numbers were not only included in the headline, but in the case of Gorman at MS, were trumpeted as he pounded his chest that MS beat GS in Q3 2011. The quality and wisdom of DVA accounting has been questionable at best and the FVO adjustments are staggering in the ratio of the magnitude of the amounts versus the amount of disclosure.
I would much rather have seen headline numbers consistent with 2011. Then we could focus on how they did that quarter. What the business outlook is. Instead, it looks like they are trying to trick the media and investors and make the story better than it is. Investors aren’t stupid. They will do the work. They will figure out the differences in how Q3 2011 and Q1 2012 were reported. Then, not only will they be disappointed with what the firms tried to trick them on, they will question what else is being done. If you are willing to “massage” (sounds better than manipulate) the way you report each quarter’s earnings to make it seem the best, what else are you willing to “massage”? Banks are opaque. On 100’s of billions of assets, what’s a bp or two here or there?
All companies should lay it on the line. Report what happened in the way they always do, then rely on themselves and their conference calls and good analysts to figure out the longer term picture. Companies have to trust in the intelligence of investors and investors will have trust in the companies.
Copyright © TF Market Advisors
Tags: 10 Year Treasury, American Stock, Bond Market, Bond Yields, Bps, Central Banks, Divergence, Earnings Release, Fixed Income, French Election, Hedge Funds, Hyg, Jnk, Lqd, Mub, Stimulus, Stock Indices, Tlt, Undertone, Volatility
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First Quarter Asset Class Performance (Bespoke)
Monday, April 2nd, 2012
Below is our key ETF matrix that highlights the performance of various asset classes during the first quarter. As shown, the best performing ETF in the entire matrix was the Financials (XLF) with a first quarter gain of 21.5%. India (INP) ranks second with a gain of 21.13%, followed by Germany (EWG) at 21.12% and the Nasdaq 100 (QQQ) at 20.99%. The worst performing ETF in Q1 was natural gas (UNG) with a decline of 38.89%. The 20+ Year Treasury ETF (TLT) and the Yen (FXY) did the second and third worst with respective declines of 7.46% and 7.15%.
Looking for more info on this market? Each Friday, members of our Bespoke subscription services receive our Week in Review newsletter. This report provides Bespoke’s current market thoughts through commentary and the unique graphs and charts that our clients have come to love. If you’re looking to get a better grasp of the market, subscribe to one of our membership packages today and download our Week in Review newsletter.
Tags: asset class, Asset Classes, Class Performance, Current Market, Decline, Declines, Ewg, First Quarter, Graphs And Charts, Grasp, India, Inp, Market Thoughts, Membership Packages, Nasdaq 100, Natural Gas, Qqq, Subscription Services, Tlt, Xlf, Yen
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The “Great Bond Selloff” of 2012
Thursday, March 15th, 2012
There has been a lot of talk since Tuesday afternoon of the “great bond selloff”… this started post FOMC meeting and supposedly was due to the Fed’s “upgrade” of the economy in the statement. The same upgrade that will do little to stop them from continuing a new round of easing once Operation Twist is over. But it has a bunch of people in a huff.
Short term the move is relatively dramatic for such a large and deep market. I will use iShares Barclays 20+ Year Treasury Bond (TLT) ETF to demonstrate but there are any number of maturities I could use; this is just a widely used instrument so a good example. Looking at a 4 month chart, a big change appears afoot.
However, if we pull the chart back some to say 8 months, we simply see the price has moved to the end of a longer term range. Indeed, this ETF is not even at October lows (remember October 2011 was one of the biggest up month’s for equities in many years), not to mention levels it was at last summer.
That said, it’s a sharp move in the span of a few days and since U.S. Treasuries yield so little the losses on the underlying can wipe out gains from interest very quickly. On the flip side, Treasuries were generally an incredibly lucrative asset class in 2011 returning far in excess of equities. So for now, it simply looks like a give back, and not the “bursting of a bond bubble” as many are screaming.
Tags: asset class, Barclays, Economy, Few Days, Flip Side, Huff, Losses, Lot, Lows, Maturities, People, Selloff, Sharp, Span, Term Range, Tlt, Treasuries, Tuesday Afternoon, Year Treasury Bond
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Asset Class Performance in February, and Year-To-Date
Friday, March 2nd, 2012
Below we highlight our matrix of key ETFs, which shows the performance of various asset classes over the last week, month, and YTD. With a new month upon us, we thought readers may be interested in seeing where things stand.
In the US, the Nasdaq 100 (QQQ) has performed the best of the major indices in 2012. Small caps have actually done the worst. Looking at sectors, Technology and Financials are up the most in 2012, while Utilities is the only sector that’s down. Looking at just February, the Materials sector is the only one that saw declines.
International markets have done very well this year. Most of the country ETFs shown are outperforming the US. Looking at commodities, silver is up the most YTD, while natural gas is down the most. And while the 20-Year+ Treasury ETF (TLT) was up the most out of any ETF shown in 2011, it’s down 3.15% so far in 2012.
Copyright © Bespoke Investment Group
Tags: Asset Classes, Class Performance, Commodities, Declines, ETF, ETFs, International Markets, Investment Group, Major Indices, Materials Sector, Matrix, Nasdaq 100, Natural Gas, Qqq, Sectors, Small Caps, Technology, Tlt, Treasury, Ytd
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2011 Key ETF Performance (Bespoke)
Tuesday, January 3rd, 2012
Before the 2012 trading year begins tomorrow, below we take a look at the final 2011 performance numbers for key ETFs across all asset classes. The left side of the table highlights all US based ETFs, which clearly outperformed the foreign ETFs shown in the top right corner of the table. The top performing ETF on the entire list was the 20-Year+ Treasury ETF (TLT) with a gain of 28.82% in 2011. The worst performing ETF was natural gas (UNG) with a decline of 46.09%.
Copyright © Bespoke Investment Group
Tags: Asset Classes, Copyright, Decline, Etf Performance, ETFs, Investment Group, Natural Gas, Performance Numbers, Tlt, Treasury
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“Risk-On” is the Flavour of October
Monday, October 31st, 2011
It is fascinating how financial markets moved from risk-off in September to risk-on in October. As shown in the chart below, courtesy of Arthur Hill of StockCharts.com, one can measure investors’ sentiment by comparing the line charts of four ETFs. “The S&P 500 ETF (SPY) and US Oil Fund (USO) rise when risk is ‘on’, while the 20+ year Bond ETF (TLT) and US Dollar Fund (UUP) rise when risk is ‘off’. SPY and USO bottomed and surged as TLT and UUP peaked and plunged,” shows Hill.
Source: Arthur Hill, StockCharts.com, October 28, 2011.
Tags: Amp, Arthur Hill, Dollar Fund, ETF, Financial Markets, Flavour, Hill Source, Investors, Line Charts, risk, Sentiment, Spy, Stockcharts, Stocks, Tlt, Uso, Uup
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Why Everyone Hates Equities And Loves Bonds
Tuesday, September 20th, 2011
Day after day we are brain-washed with the mantra of equity dividend yields being greater than treasury yields implies ‘cheapness’ or “who wants a 2% return from treasuries?”. While we have tried again and again to put this dead-end of apples-to-unicorns valuation to bed, SocGen has an excellent treatise on the subject that should make all but the most ardent Bill Miller fan comprehend the ultimate risk-reward trade-off.
At its simplest level, comparing a risky instrument with an inherently risky cash-flow stream (equities and dividends) to a risk-free (at least from a get-back-your-money basis) should be a red flag for any valuation approach – no matter how ingrained it feels. While describing risk is always prone to complexity and argument, the chart below shows that based on current levels equities (SPY) are 32% (orange line) more volatile (risky) than TSYs (TLT). At the same time, the relative yield advantage (black line) is 10.8% higher in stock dividend yields vs TSYs – so a 3:1 risk-to-reward ratio for the switch from bonds to equities.
Chart: Bloomberg
Of course capital appreciation ‘potential’ is the main argument against this simple approach and that is where SocGen’s excellent article comes in.
Sub 2% bond yields offer miserable nominal returns, but equities always carry the risk of massive drawdown. Major losses on bonds typically stem from inflation eroding returns, not major price declines. Nominal bond drawdown has rarely exceeded 10% on a 5-year rolling basis.
Let’s put the relative risk attraction of bonds and equity returns into context. The five year maximum drawdown of US Treasuries and US equities on a nominal return basis is shown above. The point here is to show just how much more risky equities are versus bonds when it comes to losing money. Equity investors have seen several periods of substantial drawdown, whilst on a nominal return basis, which is the only thing that matters when marking to market, bond drawdown has been much more limited.
And so to longer-term investing and the benefits of buy-and-hold:
How regularly each asset inflicts pain on the holder is shown below. Here we make the assumption that you buy and hold each asset for a five-year period. We then ask the question, how many times, if investing on a monthly basis, since 1950, would you have taken a 20%, 30%, 40% or 50% drawdown?
They succinctly summarize the asset allocation decision as follows:
The bond investor could have bought bonds 90% of the months since 1950 and avoided having a 20% drawdown or more, whilst the equity investor could have only invested in 40% of months to avoid such losses. Extreme drawdown of 40% or more, even on a real basis, is almost unheard of in the bond market, but seen 17% of the time in equities. Yes bonds at sub 2% offer miserable returns, but equities will always offer a higher probability of major losses and until we have an investor base that is able to take such losses, low yields and a systematic preference for bonds is likely to be with us for a while. Risk capital will also be in short supply – if you have it, better use it wisely.
As Boomers head into an uncertain retirement, we wonder whether this type of ‘realistic’ analysis will trickle-down to investor expectations and 401(k)s as the triangle of risk-reward-regret becomes more and more prescient every day.
Q.E.D.
Tags: Bill Miller, Bond Yields, Bonds, Capital Appreciation, Cash Flow Stream, Chart Below Shows, Dividend Yields, Equity Investors, Maximum Drawdown, Orange Line, Relative Risk, Return Basis, Risk Reward, SocGen, Stock Dividend, Tlt, Treasuries, Treasury Yields, Ultimate Risk, Valuation Approach, Yield Advantage
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