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2 Year Note - No Juice for the Carry Trade
I would give today’s 2-year auction a C+. Not a good sign. To get the
bid/cover ratio back to a B+ will require more juice to tempt the carry
trade.
Consider it on a leveraged basis. If one had $5mm and
some friends in town it would not be at all difficult to borrow $95mm
at the repo window and buy $100mm of the two-year note*. Assume that
the repo cost is the Fed Funds rate.
If the funds rate is
stable at .25% for the next 24 months your equity return is 17%. Not
bad. However, if the average Funds rate is 1.08% you breakeven. At an
average of 2% you are in the hole by 16%.
That is a terrible
‘rate bet’. No one in his or her right mind would do that. Your upside
is capped. It is too easy to have short rates average 1% and break
even. And if you woke up one morning with a $ problem all of your
equity would be lost.
Do the same analysis assuming the two-year
is at 2%. The 20 to 1 leveraged return tops out at 35%. While you will
not see that return, the downside would seem remote.
Leveraged
players at this big casino seem to be absent. They are just one factor
in a very big pie. This carry trade is very tempting. At the right
‘price’ leveraged risk capital will create significant demand for the
two year. That price is north of today’s auction. 1.5-1.75% is in the
cards.
*I
describe the ‘carry trade’ as a buy, borrow and hold transaction. That
is not how it works. There are many better ways to achieve this risk
profile. However, the economics and pricing of those alternatives
reflect the interest differentials. The funding differentials are the
backbone of the carry trade. 20 to 1 debt equity is not a big deal. To
play at this table you have to have an invite, and a few 100 mil.
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The sooner our auction fails the better.
If we let these liberal crooks in our government steal all our money to fund Green re-distirbution scams and UAW pork giveaways, we are doomed.
On the other hand, if we get a really messy auction soon maybe this shit has a chance to end BEFORE all our auctions start to fail continuously which will be the death of the US dollar.
I would rather see a sharp warning and auction collapse now so that we have a chance to rebound out of it. The longer we wait, the slow loss of enthusiasm over US liberal green debt bonds will cause our entire currency to collapse.
The liberals you hate so much aren't a whole lot different than the conservatives I assume you love. Wake up.
That assumption makes an ass out of you not me.
Why don't you wake up?
And yeah, that auction failure better happen soon or the dems are going to put the USA out of business for good.
There is not a single republican in a position of power in the government who has any significant contribution to legislation right now, or any clout to speak of.
I agree, not so juicy. But you don’t necessarily to take all that rate risk to get that return. If the yield curve doesn’t change, 1 year from now your bond will be priced a little north of 101, for about a 1.17% return, or 0.92% after financing. Levered 20:1 that’s 18.44%.
Not exactly following that line of thought, but for retail investors I still like the aMREITs - even here (namely HTS). Ready to bail at the scent of rate hikes, but I'm certainly not betting on that anytime soon. And I feel like it's a good counterbalance against holding the riskier mining plays.
Funding risk (noun)
see Brothers, Lehman