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Rising Rate Fund
Old 03-24-2008, 06:22 PM   #1
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Rising Rate Fund

Anybody else like the Rising Rates fund from Profunds? A 4.3% 30 year bond rate cannot last long. It's it a nobrainer if I'm willing to hold a year or so until the recession has passed? RRPIX.
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Old 03-24-2008, 07:48 PM   #2
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The reason the yields are so high is because the bond's NAV has been dropping like a rock, propping up the yields.

CHeck this out.
inverse bond funds? A two year study...

Purpose of bonds in a portfolio is to do well when equities are not doing well - to anchor the portfolio. I don't think this is a good choice on the fixed side.
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Old 03-24-2008, 08:21 PM   #3
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The reason the yields are so high is because the bond's NAV has been dropping like a rock, propping up the yields.

CHeck this out.
inverse bond funds? A two year study...

Purpose of bonds in a portfolio is to do well when equities are not doing well - to anchor the portfolio. I don't think this is a good choice on the fixed side.
I'll grant that it has not done well, is not a great vehicle for the long term, and the fund is not a portfolio candidate. As a speculation I like the odds of the 30yr being 5% sometime in the next year or two. If you buy this fund you could make around 10-15% if it hits 5%. Seems like one of the best risk/reward mad money ideas out there to me. Can the 30yr go below 4%? I don't think so unless the meltdown occurs. 4.11% is the lowest it has been in over 50 years, that was recently. Almost everyone says the treasuries are overvalued now.
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Old 03-24-2008, 08:30 PM   #4
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Good point. The Fed is a bit limited in how much further it can drop rates.. for all we know, the paranoia and flight to quality is already over and was largely unwarranted in the first place. Who knows...

Its definitely not a conventional strategy to use bonds for a capital-gains play!
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Old 03-24-2008, 08:57 PM   #5
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As a speculation I like the odds of the 30yr being 5% sometime in the next year or two. If you buy this fund you could make around 10-15% if it hits 5%. Seems like one of the best risk/reward mad money ideas out there to me. Can the 30yr go below 4%? I don't think so unless the meltdown occurs. 4.11% is the lowest it has been in over 50 years, that was recently. Almost everyone says the treasuries are overvalued now.
How do you figure this? As I understand it, this fund is short the "on the run" 30-year Treasury bond at a 1.25 leverage ratio. The duration of a 30-year Treasury with a 4.3% YTM is about 16. So if interest rates go from 4.3% to 5% over the next year, your capital return would be:

1.25 x 16 x 0.7% = 14%

But you (the fund) will have to pay the coupon, 4.3% (also levered) plus the fund charges a 1.5% annual expense ratio.

So the actual return to you would be

14% - 1.25 x 4.3% -1.5% = 7.1%

If it takes two years to reach 5%, your return would be

14% - 2 x 1.25 x 4.3% - 2 x 1.5% = 0.25%, or 0.125% per year

So, unless rates go to 5% pretty quickly, say in 6 months, I don't think this is a very good return for the risk taken.
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Old 03-24-2008, 09:28 PM   #6
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How do you figure this? As I understand it, this fund is short the "on the run" 30-year Treasury bond at a 1.25 leverage ratio. The duration of a 30-year Treasury with a 4.3% YTM is about 16. So if interest rates go from 4.3% to 5% over the next year, your capital return would be:

1.25 x 16 x 0.7% = 14%

But you (the fund) will have to pay the coupon, 4.3% (also levered) plus the fund charges a 1.5% annual expense ratio.

So the actual return to you would be

14% - 1.25 x 4.3% -1.5% = 7.1%

If it takes two years to reach 5%, your return would be

14% - 2 x 1.25 x 4.3% - 2 x 1.5% = 0.25%, or 0.125% per year

So, unless rates go to 5% pretty quickly, say in 6 months, I don't think this is a very good return for the risk taken.
Very good analysis. I'm fairly sure Profunds does not actually short the 30yr, they use futures to short. Saying they must pay the coupon is probably overstating the cost. I'll have to think a bit on whether the coupon would be entirely lost if holding futures short. They likely use a small amount of the cash in the fund as margin to sell the futures and have a return on their excess cash to partially offset the coupon issue.

I've bought this fund before but have never held the fund for more than about 3 months. In that case most of the gain was preserved. I have done well buying the fund when the 30yr gets close to 4%. It hasn't stayed there long. I only have played around with this, not serious amounts of money.

You are correct that when I gave it 2 years to hit 5%, that was overstating the situation. I would be actually looking for it to hit 5% much sooner than that. As a worst case, it could take 2 years but that would be a poor trade for me, however still profitable. I doubt I would ever hold it that long. I'll get back with you on whether I can tell if your analysis matches how Profunds manages positions within these funds. I might look at some price history to see how much costs amount to in 2 years. I do not think Profunds is very upfront on how they operate their funds.
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Old 03-24-2008, 09:51 PM   #7
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Here's one realtime example. From 6/27/05 to 6/27/06, a one year period.

The yield on the 30yr (TYX) went from 4.19 to 5.24 or 25%, pretty much what I am looking for now.

RRPIX went up from 16.62 to 20.34 or 22%
(I didn't see a dividend on RRPIX at the end of 2005 on Yahoo, I think there must of been one but I didn't dig for it. If there was one the numbers would be slightly higher on RRPIX)

So, I don't think the costs are as bad as you say, in one year RRPIX almost matched the increase in yield on the 30yr as measured by TYX. (25% vs 22%) I know this isn't exactly apples to apples but I think money can be made in these funds if rates rise.

Don't ask me how they do it but I think it is different than what you think.
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Old 03-25-2008, 07:30 AM   #8
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I made some hot money doing the same thing with RYJUX in 2003. If I were to try this trade again, I wouldn't bother with the funds. Just buy puts on TLT.
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Old 03-25-2008, 07:25 PM   #9
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I made some hot money doing the same thing with RYJUX in 2003. If I were to try this trade again, I wouldn't bother with the funds. Just buy puts on TLT.
I don't like buying options. I would sell naked options if it was easier as I like it for income (if carefully watching the risk/reward) but brokers don't want to deal with it. Also most of my money is in tax deferred accounts and they do not allow it. If buying puts, the time premium eats up the gain unless the timing is near perfect. I like RRPIX because there is little time pressure, even though as was pointed out, it is a factor if going out a year or more. With RRPIX you only have a paper loss until you sell, with options a loss is possible every time they roll over. That's my opinion anyway, to each their own.
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