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Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Thu Mar 01, 2012 8:25 am
by shoestring
I have to echo that last sentiment.  I have followed this thread with great interest as a TLT holder.  Now I'm suddenly not feeling so smart for holding TLT.

Damn.  I love one stop shopping.  How hard is it to just buy a basket of long treasuries, sit on them, and skim fees off of people like me?  Seems like good pay for little work.

Direct holdings for some portion, and investigation of perhaps VGLT and/or EDV (volatility capture) for the rest, seem to be the recourse at the moment.

I hate when I lose faith in a consumer product.  I wonder if TLT/VGLT are different enough (I think they are but the IRS might not) you could at least do some tax loss harvesting.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Thu Mar 01, 2012 11:32 am
by craigr
WildAboutHarry wrote:
CraigR wrote:Yes the benefit of the fund is you deposit your money and get end of day closing price. No need to worry about bid-ask spreads, commissions, etc. For someone in the Permanent Portfolio there is so little trading that the intra-day pricing of ETFs is not an advantage anyway.
I agree and much prefer funds to ETFs for all of the obvious reasons.

One problem with modern investing in general is there are too many damn choices.  

For example, Vanguard came out with free ETFs in their accounts, so off I went to ETFs.  A short time later -- listen to the paranoia creep in -- they offered many of the same funds as Admiral shares at $10K minimums.  So now I am stuck with ETFs when I really want to be in funds.  And it takes three days to unwind an ETF position to get back into funds at Vanguard.

Go figure.
Of the ETFs, the Vanguard ones are least likely to have problems. IMO. They are just shares of the main fund. So I wouldn't worry about what you have. However I would not put in automatic stop limit orders on them just in case we get Flash Crash 2.0. If there is some kind of serious problem in the market you want to be able to evaluate the situation yourself and not have some automated tools doing things for you.

But with that said, the iShares are pretty decent as well and are getting a good track record. I am not thrilled with what is happening in TLT, but then you look at Vanguard's Treasury funds and they have a decent percent (now around 13%) in mortgages. The number had even been higher in the past. They may also enter into repo agreements that could generate non-treasury income as well at their discretion.

Really the only way to avoid the decisions of bond fund managers is to be your own bond fund manager and just buy the things directly. I wish it weren't the case, but sadly it just is.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Fri Mar 02, 2012 12:44 am
by murphy_p_t
craigr wrote: However I would not put in automatic stop limit orders on them just in case we get Flash Crash 2.0. If there is some kind of serious problem in the market you want to be able to evaluate the situation yourself and not have some automated tools doing things for you.

if we're doing PP...maybe we should have a buy order for VTI...way under the current trading price?

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Fri Mar 02, 2012 7:41 am
by steve
I personally like ETF's better then funds. When I buy something or sell something I like knowing how much I am buying and how much I am paying. I hardly ever trade and funds would work also but I like interday pricing.
I do not worry about a flash crash. If anything I could use it to my advantage.
With VTI for example the bid -ask spread is very tight and there is no commission if you are a Vanguard client.
The reason I like GTU for part of Gold holding is that it is a fund and trades with interday pricing so it is the best of both worlds.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Fri Mar 02, 2012 8:57 am
by WildAboutHarry
steve wrote:I personally like ETF's better then funds. When I buy something or sell something I like knowing how much I am buying and how much I am paying. I hardly ever trade and funds would work also but I like interday pricing.
A nice but minor factor in favor of funds is buying fractional shares.  If I have $5,000 I can buy $5,000 worth of a fund.  Can't do that with ETFs.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Fri Mar 02, 2012 2:12 pm
by steve
WildAboutHarry wrote:
steve wrote:I personally like ETF's better then funds. When I buy something or sell something I like knowing how much I am buying and how much I am paying. I hardly ever trade and funds would work also but I like interday pricing.
A nice but minor factor in favor of funds is buying fractional shares.  If I have $5,000 I can buy $5,000 worth of a fund.  Can't do that with ETFs.
It great that there are both funds and ETFs so everyone can get what they like. For me I like the fact that with the click of refresh all on my spread sheet I can see the value of my holdings anytime. Other information  I like to see is my percent increase or decrease from my last rebalance point, year to date etc. and other usefull information for example if I need to rebalance how much, it also shows me what GTU premium or discount is and I can do it anytime. I feel like I can make better decisions knowing where I stand at all times.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Fri Mar 02, 2012 5:04 pm
by AgAuMoney
WildAboutHarry wrote:A nice but minor factor in favor of funds is buying fractional shares.  If I have $5,000 I can buy $5,000 worth of a fund.  Can't do that with ETFs.
Yes you can.  Fractional shares in ETFs and stocks and CEFs are entirely up to your broker.

I do fractional shares in ShareBuilder (was ING, now Capital One).

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Fri Mar 02, 2012 7:28 pm
by WildAboutHarry
AgAuMoney wrote:Yes you can.  Fractional shares in ETFs and stocks and CEFs are entirely up to your broker.
I know you can reinvest dividends into fractional ETF shares, but can you buy them?  i.e., buy an even $100 (or $1,000, or $10,000)?

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Fri Mar 02, 2012 11:18 pm
by AgAuMoney
WildAboutHarry wrote:
AgAuMoney wrote:Yes you can.  Fractional shares in ETFs and stocks and CEFs are entirely up to your broker.
I know you can reinvest dividends into fractional ETF shares, but can you buy them?  i.e., buy an even $100 (or $1,000, or $10,000)?
Yes.  And not just ETFs but regular company shares, partnership shares, most every ticker symbol.  (When sharebuilder first started they had a pretty short list of tickers you could buy, but it is nearly comprehensive now.)

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Sat Mar 03, 2012 8:08 am
by WildAboutHarry
AgAuMoney wrote:Yes.  And not just ETFs but regular company shares, partnership shares, most every ticker symbol.  (When sharebuilder first started they had a pretty short list of tickers you could buy, but it is nearly comprehensive now.)
Alas, not at Vanguard.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Thu Mar 08, 2012 2:39 am
by murphy_p_t
is the concern with TLT also applicable to SHY/SHV?

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Fri Mar 09, 2012 7:40 am
by WildAboutHarry
Yes

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Fri Mar 09, 2012 10:55 am
by rickb
murphy_p_t wrote: is the concern with TLT also applicable to SHY/SHV?
WildAboutHarry wrote: Yes
I agree the answer is yes, but if they actually hold 100% cash collateral, marked to market every day, the risk for loans involving the bonds held by SHY/SHV is considerably different because these bonds are so much less volatile than the long term treasuries held by TLT.   The main risk we've talked about regarding TLT is that the borrower (who has almost certainly sold the borrowed bonds short) gets caught on the wrong side of a large, sudden downward move in interest rates - and can't afford the cash to mark to the new market price (and then defaults, and all manner of ugliness ensues).  The shorter duration of the bonds held by SHY/SHV makes the potential mark to market obligation for these much, much less (at least in percentage terms), so a default based on a price spike would seem to be fairly unlikely (and they pay approximately 0% now anyway, so how much lower can interest rates really go?). On the other hand, one might wonder what form(s) of "cash" the fund considers acceptable as collateral and what the fund does with this cash for the duration of the loan - I mean, they probably don't insist on stacks of dollar bills and then put these dollars in a vault.  I'm sure if you called them up they'd be happy to tell you all the gory details - unless of course they're hiding something in which case they either won't tell you or they'll lie to you.

The question boils down to how much do you really trust iShares (BlackRock) to be appropriately managing any risks that might be involved in these sorts of loans, presumably up to and including making these funds "whole" again in the face of any problems that might occur.  Are they completely trustworthy, or might they become the next MF Global?  If you directly hold long term treasuries (even through a broker), directly hold short term treasuries, and hold physical gold only 25% of your assets are subject to these (presumably remote) sorts of risks.  Yes, there are other risks involved - but ask yourself, "what's the worst that can happen"?  Part of the genius of Browne's preferred allocation is that not only are the asset classes diversified in a return sense, but they're also so different that they're diversified in a fundamental risk sense. If you hold the assets in the preferred form, any one risk is effectively firewalled to only one asset class.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Fri Mar 09, 2012 11:21 am
by WildAboutHarry
Agree about relative risk, but if you are expecting income of a specific kind, and the "treasury" fund only delivers 50% from that source, that is misleading on the part of the fund at best.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Fri Mar 09, 2012 12:18 pm
by alvinroast
I agree about the relative risk since ST rates are so low. (Although if they go negative that would get very interesting).

I'm a bit biased since I have close to zero trust in Blackrock. When liquidating my wife's fund holdings I found that there was a whole lot of self dealing going on. The stock fund she was in was loaning upwards of 5% of it's funds to another Blackrock unit. The way I see it if I wanted to invest in Blackrock I would do so directly. There seem to be so many layers of counter-party risk just within Blackrock itself that I wouldn't want anything to do with them even if a specific fund seemed transparent.

Of course I'm not exactly thrilled about the 20% non-treasury in VG treasury funds either. ::)

Now that TreasuryDirect has finally approved us to loan money to the government (apparently they are concerned that terrorists will try to loan money to the government or something) we can just go direct for the "deep assets" TM? Has MT trademarked that yet?

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Sat Mar 10, 2012 12:12 am
by rickb
WildAboutHarry wrote: Agree about relative risk, but if you are expecting income of a specific kind, and the "treasury" fund only delivers 50% from that source, that is misleading on the part of the fund at best.
If this is "extra" income (income that would simply not be there if they didn't do the fancy lending) why do you care?  I don't know the accounting rules, but I'm assuming if they have, say, $1M of LT bonds paying 3% they report $30,000 of however much income the fund generates as "treasury" interest whether these bonds are loaned out or not - and if they're loaned out they might generate an additional (wild ass guess) 1% interest, so $10,000 more.  Given these numbers, they'd report 75% of their income from "treasury" sources - but the income would only be 75% of the reported total if they didn't do the lending.  I think the bottom line is the lending generates more income than the bonds would generate without the lending - supporting the claim that this is a "net benefit" for the shareholder.
alvinroast wrote: I'm a bit biased since I have close to zero trust in Blackrock.
I'm with you 100%.  I used to keep all of my LT bond allocation in TLT and a very large portion of my cash allocation in SHY.  Due to the various threads here about loaning assets and after some reflection about it, I've liquidated all the TLT in favor of actual LT bonds (this was remarkably easy - I would strongly encourage anyone here who can buy LT bonds directly to do so), and I'm setting up a ladder of 2-year bonds that I'm moving cash into (out of SHY).  I-bonds for cash are great as well, although the limits on how much you can purchase are kind of annoying.

Other people may completely trust BlackRock.  I'm OK with that as long as it's an "eyes wide open" situation.  However, someone with 25% LT bonds in TLT, 25% cash in SHY, and 25% gold in IAU has 75% of their assets with BlackRock.  I'd consider this crazy.  And I think Harry Browne would agree.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Sat Mar 10, 2012 9:20 am
by WildAboutHarry
...why do you care?
Because of state taxes in taxable accounts and taxable HSAs in CA and a few other states.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Sat Mar 10, 2012 10:32 am
by fnord123
rickb wrote:Other people may completely trust BlackRock.  I'm OK with that as long as it's an "eyes wide open" situation.  However, someone with 25% LT bonds in TLT, 25% cash in SHY, and 25% gold in IAU has 75% of their assets with BlackRock.  I'd consider this crazy.  And I think Harry Browne would agree.
This is to me the strongest argument to reduce my TLT holdings.  One of the big benefits of indexing is diversification, so the PP uses an index for the stock portion of the portfolio.  The PP itself is extremely diversified, with 4 relatively uncorrelated asset classes.  Diversification is very valuable in terms of decreasing risk.  If BlackRock turns into another MFGlobal tomorrow, I would want to make sure my exposure to it as a firm would be small enough that my portfolio doesn't get trashed.

As a result of this thread I just sold a good size pile of TLT and put in a buy order @ Vanguard for yesterday's 30yr Feb 2042 treasury re-open.  With whatever is left I plan on buying 30yr treasuries on the secondary market.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Sun Mar 11, 2012 3:41 pm
by AgAuMoney
rickb wrote: Other people may completely trust BlackRock.  I'm OK with that as long as it's an "eyes wide open" situation.  However, someone with 25% LT bonds in TLT, 25% cash in SHY, and 25% gold in IAU has 75% of their assets with BlackRock.  I'd consider this crazy.  And I think Harry Browne would agree.
I agree you need to be aware that blackrock is the custodian for those funds.

However, it isn't like blackrock has any ownership claim on the assets in those funds.

in other words, blackrock is the custodian, and even if they were to go completely bankrupt they and their creditors have no claim on the assets in the funds.

A custodian is like putting cash into a safe deposit box in a bank as compared to depositing cash into a bank account.  When you make a deposit, you lend money to the bank and they promise to give you your money back later.  When you put cash into a safe deposit box the bank promises to keep your box safe for you, and you can get insurance on the the contents of that box should the bank fail to keep its promise (eg as a rider on your homeowners insurance).  The amount you have on deposit in a bank account is listed as an asset on the balance sheet of the bank, and if they go bankrupt all assets including your "balance" are divided amongst the creditors.  (FDIC insurance is a depression-era attempt to ameliorate fear of that risk.)  The safe deposit box contents are exclusively yours.

Any malfeasance on the part of blackrock where they misappropriate the assets in the funds is what your broker's SIPC insurance (and supplemental insurance for amounts in excess of SIPC) is supposed to cover.

This is nothing like an MF Global situation because hedge funds are an entirely different structure than mutual funds and ETFs.  Putting money in a hedge fund is more like depositing money into a bank account than like putting cash into a safe deposit box or money into an ETF.  It is a bit more complicated because of securities regulations, and that's part of the reason for the increased discussion about what it means and takes to be a qualified investor for purposes of investing in a hedge fund.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Sun Mar 11, 2012 7:06 pm
by fnord123
AgAuMoney wrote:This is nothing like an MF Global situation because hedge funds are an entirely different structure than mutual funds and ETFs.
MF Global was not a hedge fund, it was a derivative broker and a primary dealer.  Perhaps you are thinking of Man Group, which was indeed similar to a hedge fund.  MF Global has been a distinct legal entity from Man Group since 2007.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Sat Mar 17, 2012 1:38 pm
by AgAuMoney
fnord123 wrote:MF Global has been a distinct legal entity from Man Group since 2007.
Thanks for the correction.

MF Global was indeed operating as a broker-dealer, and the problem was they mingled customer assets with their own and lost one or more big bets.  Accounts with them were similar to a custodial arrangement ala Blackrock, but more comparable to your typical brokerage account.  (I'm not positive, but it appears all the accounts with MF Global would have been "margin" accounts.)

Where it gets really messy, is that MF Global claims the customer assets were collateral (for their margin), therefore rehypothecation was allowed as customary use even if not desirable or even suspected by the account holders.  Those customers still have legal title, but because of their account agreements may have assumed this additional risk (and should have known about it).  It has to be settled by Mr. Freeh in bankruptcy court.  :(

(Hypothecation being the pledge or surrender of assets as collateral for a debt, e.g. pawning a ring, taking out a mortgage, a car title loan, or a margin account.  Rehypothecation is when whomever you surrendered your assets for collateral uses them as collateral for their own loan, e.g. a pawnshop repawning your stuff with someone else while you still have a claim to the goods.)

In a brokerage cash account, as opposed to a margin account, your assets are not pledged as collateral.

I don't recall anything from the Blackrock legalese that would mean hypothecation.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Wed Mar 21, 2012 8:25 am
by jco
Very disturbing... Maybe we could start a petition of some kind and try to get them to address these concerns?

I'd sell it outright but I have a lot of capital gains in TLT waiting... And my taxable income will be much lower next year. :-\

... Damnit, was so happy with TLT; easy to liquidate, monthly dividends >:( Wall St is just incapable of not screwing with a good thing.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Sun Mar 25, 2012 6:21 pm
by murphy_p_t
jco wrote: Very disturbing... Maybe we could start a petition of some kind and try to get them to address these concerns?
when it comes to markets / capitalist system, i think the way operators take notice is thru buy/selling...

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Wed Mar 28, 2012 11:14 am
by moda0306
murphy_p_t wrote:
jco wrote: Very disturbing... Maybe we could start a petition of some kind and try to get them to address these concerns?
when it comes to markets / capitalist system, i think the way operators take notice is thru buy/selling...
Of course, once you throw human nature into the equation, only once the SHTF does the market react.  We are sheep... well not us in this forum, but the investing public in general.

Re: TLT - Why Is Income from Govt Obligations so LOW?

Posted: Thu Mar 29, 2012 9:07 pm
by jco
moda0306 wrote:when it comes to markets / capitalist system, i think the way operators take notice is thru buy/selling...
LOL, of course... With a cooler head I can shake my head in embarrassment at my earlier comment, as I'm sure HB would have done.

Plans are in place to decouple from TLT and move into mostly actual bonds, the remainder into competing ETFs... I hope iShares feels us moving away.