TLT - Why Is Income from Govt Obligations so LOW?

Discussion of the Bond portion of the Permanent Portfolio

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

Post by Tyler » Sun Jun 03, 2012 12:39 am

Makes sense.  So if their securities lending income is solely from interest on the 100% cash collateral marked to market every day and invested in an established institutional MMF under the same company umbrella (that they have a vested interest in preserving), then that sounds to me like a higher risk setup than direct treasuries but still a reasonably low risk as far as Wall Street machinations go.  Enough to make you think about it (and look at direct treasuries as an alternative), but not enough to lose sleep over if you own some TLT.  The odds of losing large chunks of capital seem pretty low.  More likely, you may simply see returns that trail direct treasuries should a borrower not be able to pay up on a days worth of volatility or the fund need to cover losses in the MMF collateral if they over-extended themselves for yield and lost money with risky investments.  

Incidentally, a quick search indicates that many Fidelity/Schwab/other funds appear to operate under a similar setup so this doesn't seem to be just a Blackrock thing.  Doesn't make it right, though.

Anyone can correct me if I'm missing something.
Last edited by Tyler on Sun Jun 03, 2012 2:17 am, edited 1 time in total.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by rickb » Sun Jun 03, 2012 2:16 am

Tyler wrote: Enough to make you think about it (and look at direct treasuries as an alternative), but not enough to lose sleep over if you own some TLT.  The odds of losing large chunks of capital seem pretty low.  More likely, you may simply see returns that trail direct treasuries should a borrower not be able to pay up on a days worth of volatility or the fund need to cover losses in the MMF collateral if they over-extended themselves for yield and lost money with risky investments. 
I'd say this a little stronger.  If you possibly can, buy long term treasuries directly.  If you can't, TLT may be a reasonable alternative but be aware that it has risks that directly holding long term treasuries does not.  In many ways, it's similar to buying actual gold coins as opposed to any of the gold ETFs or closed end funds. 
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by Tyler » Sun Jun 03, 2012 2:18 am

Understood.

One thing I was wondering, though -- from Gumby's Treasury Bond Buying Tutorial, there's a note at the bottom that even direct bonds held at a broker are held in their street name and can be lent out at their discretion (that's why they're willing to offer free bond trades).  Just curious -- how is this different/better/safer than when iShares does it?
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by hoost » Sun Jun 03, 2012 2:20 am

Tyler wrote: Understood.

One thing I was wondering, though -- from Gumby's Treasury Bond Buying Tutorial, there's a note at the bottom that even direct bonds held at a broker are held in their street name and can be lent out at their discretion (that's why they're willing to offer free bond trades).  Just curious -- how is this different/better/safer than when iShares does it?
That's a good question.  Offhand, it seems like there are less pieces of paper between you and the bond and less expenses; however, I may be completely missing a major risk, so take that with a grain of salt.  I'd be interested to hear opinions to the contrary.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by rickb » Sun Jun 03, 2012 12:24 pm

Tyler wrote: Understood.

One thing I was wondering, though -- from Gumby's Treasury Bond Buying Tutorial, there's a note at the bottom that even direct bonds held at a broker are held in their street name and can be lent out at their discretion (that's why they're willing to offer free bond trades).  Just curious -- how is this different/better/safer than when iShares does it?
I believe that unless your account is specifically set up as a margin account the brokerage should not be lending out any securities in your account, and that the notion that anything held in street name in a non-margin account can be lent out is simply incorrect.  If anyone knows this for sure, please comment.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by Pointedstick » Sun Jun 03, 2012 7:19 pm

I swapped my TLT out for EDV (right before it happened to shoot up 9% too ;D ). I have a lot more trust in Vanguard, and this also gives me a bit more institutional diversification. I was 75% in iShares/BlackRock funds before!  :o
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by Tyler » Mon Jun 04, 2012 12:40 pm

I followed up with Fidelity and asked about lending of bonds purchased directly through your brokerage account.  Here is their response:

"With regard to how the bonds are held, they are held in street name just like any other securities held in your account with Fidelity; however, we do not lend out or hypothecate fully paid for securities in a cash account. This would only be done under certain circumstances in a margin account where you have agreed to this activity as part of the margin agreement."

So yes, holding bonds in a cash account (through Fidelity, at least) carries less risk than pretty much any fund.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by vnatale » Mon Jan 13, 2020 8:29 pm

From 8 years ago....

Concern was expressed that TLT does not derive all its income from government obligations since it loans out some of its assets. This then exposes some of the income from it to be taxed at that state income tax level.

I assume that nothing has changed with this?

Near the end Tyler expressed the opinion that while there was some risk in this it was fairly minimal.

I assume that nothing has changed with what TLT is doing?

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

Post by Kbg » Tue Jan 14, 2020 9:06 am

IDK one way or another, what I do know is there are actual equivalent alternatives to TLT now that have much cheaper fees from Vanguard and Schwab.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by Tyler » Tue Jan 14, 2020 10:56 am

One thing I've learned is that virtually all index funds today engage in securities lending. It's not just a TLT or BlackRock thing. State Street, Vanguard, Schwab -- they all do it. So if it bothers you, then you should really prioritize holding the assets directly rather than going through a fund.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by Kbg » Tue Jan 14, 2020 11:13 am

+1

Also, the owner remains the owner and they can pull back the lend at anytime usually. While it’s called stock lending the reality is more like renting your stocks out with appropriate ledger entries.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by Smith1776 » Tue Jan 14, 2020 2:04 pm

Yeah, Blackrock wrote a paper on this subject.

They claim that they've never lost customer assets from securities lending ever. And even the few times borrowers defaulted, they were fully protected from the collateral the borrowers posted. They simply took the collateral and bought the shares that had been lent out. Easy peasy on their end.

Still, I'm somewhat hesitant about securities lending that can go too far. If the market ever has liquidity issues there could be problems for the funds.

If I recall correctly, Vanguard's securities lending is much more modest than Blackrock.
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