Basis:
- In this period of high inflation the Federal Reserve has expressed its intention to raise short term interest rates.
- It is widely accepted that when short term rates rise , long term rates tend to follow; Interest rate changes are investable through Treasury bills, notes, and bonds.
- Prices of treasury bills, notes, and bonds are inversely related to yields/interest rates, as interest rates/ yields rise, prices of bills, notes, and bonds decline.
- Tradeable securities exist that have sole exposure to treasuries. The value of these securities will be directly affected by increases in interest rates.
Inflation: US 7.9% year over year, Target 2%
You can find how the Federal Reserve controls inflation by clicking here
Potential Trade
$TMV
- TMV is a publicly listed ETF that gives 3x inverse leverage exposure to the ICE U.S. Treasury 20+ Year Index. This means that for every 1% decrease in the ICE index TMV rises by 3%
- The ICE U.S Treasury 20+ Year Index has been falling as the value of 20 year Treasury bonds decreases due to higher interest rates.
- TMV was trading at a high of $236.60 per share on November 2nd, 2018, the US 20 year treasury yield peaked at a high of 3.37% on November 2nd 2018, and the ICE index hit a low of $99.82 on November 2nd, 2018.
- TMV is currently trading at $78.04 and the current 20 year Treasury yield is 2.74%, the ICE index is trading at $122.01
Viable strategies
- Protective put strategy: buy 100 shares of TMV and purchase at the money put option with longest expiration. Cost:$7804 + option premium Max profit: Unlimited. Max Loss: Put option premium
- Naked Call option: Buy at the money calls with longest expiration: Cost: Call option premium Max Profit: Unlimited Max Loss: Call option premium.
- Buy shares: Buy # shares: Cost: Quantity x share price Max Profit: Unlimited Max Loss: Entire investment
Investment Horizon: 1 year
- Economists have projected up to 8 rate increases by the end of 2022, as the rates rise so will TMV.