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This fund seems to move opposite the S&P500-zero coupon fund
I don't know any thing about zero coupons, so I'm hoping someone can explain what they are and maybe how this fund works. A friend said to check out BTTRX if you want something totally uncorrelated to the S&P500. He is right. They almost appear to be inverse.
Can someone please describe a zero coupon mutual fund? I haven't heard it mentioned on the board as a portfolio diversifier before.
Hi Mike- maybe Catch22 can help a bit with this one. He and I were discussing this subject with respect to a number of American Century "Target Date" funds, and here is a partial section of his commentary:
As to the Am Cent Target date funds. These are Zero Coupon bond issues. Aside from the 2015 and 2020 years (when the fund will close), there is also a BTTRX; which is the 2025....this one will knock your socks off. More so the 2025 versus the other two is tied pretty much to the 30 yr Treasury bond yield; which has continued to drop since August.
Use your chart site again and place BTTRX, FLBIX, TIP, STPZ, LTPZ, VEDTX, TLT and ACITX. I have not run these on a chart and there will be some differences as they are all not twins; but you will see the effects of the Treasury bond areas and the continued drop in yields from folks wanting these during unsettled times and the resulting increase in value. When, at some point in the future that interest rates are allowed to; or forced to rise, these excellent numbers today, will head to the downside. My most watchful problem here in trying to find when the winds start to shift with rising interest rates !!!
Zero coupons bonds are bought at a "discount" to their face value. They are usually 30 year bonds. Each year the redemption value of the bond increases closer and closer to its face value. It pays no dividend or coupon. If you owed a zero coupon bond in a taxable account you would pay taxes on the increased value as if it was a yield. Zero coupon bond funds are a collection of zero coupon bonds. American Century offer a number of the zero coupon bond funds that have expiration dates that span in 5 year increments. I have owed BTTTX which matures in 2030. Your fund, BTTRX, started in 1996 and will mature in 2025 (30 years). Its share price in 1996 was about $20. Check out this chart by selecting maximum as a time frame. http://finance.yahoo.com/echarts?s=BTTRX+Interactive#chart1:symbol=bttrx;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined Because it is impacted by market investors this fund can attract a lot of interest at times causing its share price to trade higher than its intrinsic zero coupon value. It is a safe haven when markets move negative. I have tried to use this fund and other like it (EDV) to "hedge" an allocation that I might have. For example, I "hedge" my energy sector allocation (VGENX) with BTTTX (zero coupon 2030). My VGENX is my allocation position (90% of my allocation) and BTTTX (10% of my allocation) is my hedge. If and when I show a profit in my allocation (my trigger is a 10% profit) I sell 10% of VGENX and buy more BTTTX with these profits. I am usually buying BTTTX when it is a little out favor. If and when VGENX moves negative this same (10%) I sell some BTTTX and buy more VGENX. I usually wait for a 10% loss before I start this process. For me it is just another way of buying low and selling high. Here's the two funds charted together using yahoofinance: http://finance.yahoo.com/echarts?s=BTTRX+Interactive#chart1:symbol=bttrx;range=my;compare=vgenx;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
Reply to @bee: bee, what you've been doing is not hedging, but a classic asset allocation (smartly using uncorrelated classes) with periodic rebalancing at 10% triggers.
And all along I have thought I was my very own hedge fund manager...oh well, this is still an improvement over being called an ass...( I'll take asset allocation manager any day) Thanks for your encouragement.
bee; A question if you will allow. During the time period 6/08 - 6/09. How much did your reblancing help stablize your account? Or should I be looking after that time period, ( VGENX) had hit bottom & was on the way to recovery.
I actually started this after experiencing the commodity crash of the time period you reference and noticed the inverse movement of BTTTX. Vanguard offers an ETF (EDV) that has similar dynamics to BTTTX. It actually seems even more volatile...bigger swings up and down. But, when paired with VDE, Vanguard Energy or VWO, Vanguard Emerging market it seems to make a good dance partner. Recently I came across a USAA fund, UMAFX, which seems to use this type of approach as a fund strategy. There are probably many fund managers that do this for their investors but I am not aware of what funds they are. Maybe others will chime in.
Reply to @Old_Joe: Thank you Joe. I wish I would have noticed (or understood) this discussion earlier, but I'm sure it went over my head. So I'm thinking the 'easy' money has already been made on this type of investment. If and when treasuries start to increase yield these funds will what they have gained (?).
You have received some very good info; and I note that OJ mentioned a discussion we had about some this. I will attempt to get back to this with my 2 cents a bit later. Have to hit the road for a bit. I will "edit" this post section, but I don't know if it will record as a new post or what to notify you.
Hi Mike- actually, that wasn't a board discussion, but via email. You're question is exactly what's been holding me back too- Too late to jump on this? Maybe we can get some more input from other posters...
Since BTTRX seems to move against decreasing US bond rates, and those rates are already about at rock-bottom, I'm thinking that it's indeed too late on this.
Standby... I'm going to post a request for input on this.
This fund holds long term bonds, typically 30 years to mature from first issue. It is zero coupon meaning that someone split the original bond into two, zero coupon (strips) and the coupon trading independently.
The long bonds have less correlation with S&P 500. Typically they do well when stock market is declining and they suffer when stock market is rallying.
They are also subject to interest rate risk. If rates go up, the high duration will hurt the secondary market pricing of these bonds (and the fund must mark to market every day). So, looking at the past few years or even decade you can conclude these bonds are appropriate investment.
I would be cautious in investing in long bonds especially in a fund form. Insurance companies typically buy long bonds in the bond form to meet their long term obligations and they can hold these bonds to maturity. If you are not going to hold long bonds to maturity, my suggestion is to stay away. Use an intermediate duration bond fund instead.
The various replies in this thread pretty much cover the facts about "zeros"; a bond that has value at maturity in "x" amount of time, but that does not pay a current or ongoing yield via a distribution, in the case of a bond fund.
Many of we older folks may have already been involved in "zeros" as a gift to another or gifted to us when we were much younger..........being the good, old plain jane savings bond that could be purchased at a bank or CU. The EE series type is a bond that pays no current yield, is purchased at a discount to face value when it fully matures in the future. This also applies to today's T-bills with a duration of 1 year or less. If one buys such a fund, the value comes from the rotation of the older bills reaching maturity (full value) and constantly being replaced with newer issued T-bills.
This chart compares a few long duration Treasury bonds type funds/indexes. BTTRX does not vary much from TLT or FLBIX. Two things about the chart: you may hover the pc mouse at any point on chart line for a particular fund to find it price on a partiuclar date. Also, just below the bottom of the chart, you will find a "slider" for a time line that is currently set at its default of 200 days. You may slide this to the left for a much longer time frame. When doing this you may view a few particular price moves, especially the up moves and note a few days. Upward price changes in and around April/May of 2010 and 2011, and the price move in July, 2011. The first two involved ongoing problems with Greece and the EuroZone. The July/Aug 2011 involved the announcment of the quality downgrade of U.S. debt. Among all of the various upward moves of these funds are a number of announcments from the Fed. Reserve that it would be buying bonds to support their programs. I suspect this support is still in place to hold down longer term rates in the hopes of maintaining low mortgage rates to help stimulate this sector; as it is a known "sick" area of the economy and continues to be a big drag. Recent Fed announcments indicate a similar support/buying program in the mortgage securities area. I am watching this area to determine moves.
Anyhoo..........I hope looking at the chart helps you see a bit more. Is all of the big fun gone from the long bond area? Perhaps most of it is gone; but traders know there are still many underlying problems, and any baby black swans may continue to allow for "some" positive movement in this area of safe havens.
You wrote: "I would be cautious in investing in long bonds especially in a fund form. Insurance companies typically buy long bonds in the bond form to meet their long term obligations and they can hold these bonds to maturity. If you are not going to hold long bonds to maturity, my suggestion is to stay away."
I don't follow your thoughts with this statement. Are you suggesting that insurance companies and/or perhaps pension funds, too; hold many of these type of bonds and that somehow affects the investments in this area?
This question is only related to one holding a fund, etf or index that is invested in long term bonds; not individual long term bonds (of which, this house would not do).
Not unlike any investment sector; there is a time and place, an in favor or out of favor for any number of reasons; but I don't understand what may cause "extra danger" to be invested in long bond funds at the appropriate time has to do with the fact that the bonds may also be held by insurance companies.
The accompanying chart suggests the movements are related to Fed Reserve policy notices, interest movements and safe haven demands and ignores who may of may not be holding long bonds.
In spite of chatter from China or any other soverign holding Treasury issues about U.S. budget/debt problems; at least for 2011, I doubt that there is any disappointment with the stellar returns on long bonds, and is likely one of their best investments for this year.
Reply to @catch22: I am not saying insurance companies and pensions effect price movements. All I'm saying they hold individual bonds to meet specific future payments so that when that specific payment is due for payout they can make sure there is money for that. Thus for the insurance company holding this bond, volatility and daily price variations are inconsequential. They hold to maturity. For your fund holding these bonds, since the bond prices will be market to market, the NAV will go up and down. There is a difference in use.
Right now these type of bond funds are enjoying stellar returns. Due to duration of the bonds, in a reversal of fortunes those could also turn to stellar losses.
Hey there Mike- Well, we certainly got a whole lot of info on this, and mucho gracias to all who responded. Doesn't look like a great bet at this point in time, but keep the various strategies in mind for the next go-around.,
Comments
As to the Am Cent Target date funds. These are Zero Coupon bond issues. Aside from the 2015 and 2020 years (when the fund will close), there is also a BTTRX; which is the 2025....this one will knock your socks off. More so the 2025 versus the other two is tied pretty much to the 30 yr Treasury bond yield; which has continued to drop since August.
Use your chart site again and place BTTRX, FLBIX, TIP, STPZ, LTPZ, VEDTX, TLT and ACITX. I have not run these on a chart and there will be some differences as they are all not twins; but you will see the effects of the Treasury bond areas and the continued drop in yields from folks wanting these during unsettled times and the resulting increase in value. When, at some point in the future that interest rates are allowed to; or forced to rise, these excellent numbers today, will head to the downside. My most watchful problem here in trying to find when the winds start to shift with rising interest rates !!!
Hope this helps some- OJ
Zero coupons bonds are bought at a "discount" to their face value. They are usually 30 year bonds. Each year the redemption value of the bond increases closer and closer to its face value. It pays no dividend or coupon. If you owed a zero coupon bond in a taxable account you would pay taxes on the increased value as if it was a yield. Zero coupon bond funds are a collection of zero coupon bonds. American Century offer a number of the zero coupon bond funds that have expiration dates that span in 5 year increments. I have owed BTTTX which matures in 2030. Your fund, BTTRX, started in 1996 and will mature in 2025 (30 years). Its share price in 1996 was about $20. Check out this chart by selecting maximum as a time frame.
http://finance.yahoo.com/echarts?s=BTTRX+Interactive#chart1:symbol=bttrx;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
Because it is impacted by market investors this fund can attract a lot of interest at times causing its share price to trade higher than its intrinsic zero coupon value. It is a safe haven when markets move negative.
I have tried to use this fund and other like it (EDV) to "hedge" an allocation that I might have. For example, I "hedge" my energy sector allocation (VGENX) with BTTTX (zero coupon 2030). My VGENX is my allocation position (90% of my allocation) and BTTTX (10% of my allocation) is my hedge. If and when I show a profit in my allocation (my trigger is a 10% profit) I sell 10% of VGENX and buy more BTTTX with these profits. I am usually buying BTTTX when it is a little out favor. If and when VGENX moves negative this same (10%) I sell some BTTTX and buy more VGENX. I usually wait for a 10% loss before I start this process. For me it is just another way of buying low and selling high.
Here's the two funds charted together using yahoofinance:
http://finance.yahoo.com/echarts?s=BTTRX+Interactive#chart1:symbol=bttrx;range=my;compare=vgenx;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
And all along I have thought I was my very own hedge fund manager...oh well, this is still an improvement over being called an ass...( I'll take asset allocation manager any day) Thanks for your encouragement.
I like your plan, too.
A high five to you.
Catch
During the time period 6/08 - 6/09. How much did your reblancing help stablize your account? Or should I be looking after that time period, ( VGENX) had hit bottom & was on the way to recovery.
Thanks, Derf
Hi Derf,
I actually started this after experiencing the commodity crash of the time period you reference and noticed the inverse movement of BTTTX. Vanguard offers an ETF (EDV) that has similar dynamics to BTTTX. It actually seems even more volatile...bigger swings up and down. But, when paired with VDE, Vanguard Energy or VWO, Vanguard Emerging market it seems to make a good dance partner.
Recently I came across a USAA fund, UMAFX, which seems to use this type of approach as a fund strategy. There are probably many fund managers that do this for their investors but I am not aware of what funds they are. Maybe others will chime in.
Thank you Joe. I wish I would have noticed (or understood) this discussion earlier, but I'm sure it went over my head. So I'm thinking the 'easy' money has already been made on this type of investment. If and when treasuries start to increase yield these funds will what they have gained (?).
You have received some very good info; and I note that OJ mentioned a discussion we had about some this. I will attempt to get back to this with my 2 cents a bit later. Have to hit the road for a bit.
I will "edit" this post section, but I don't know if it will record as a new post or what to notify you.
Catch
Since BTTRX seems to move against decreasing US bond rates, and those rates are already about at rock-bottom, I'm thinking that it's indeed too late on this.
Standby... I'm going to post a request for input on this.
OJ
Thank you very much Bee for the explanation and a look at how you use your inverse strategy. Sell the profits, buy what's low.
http://bonds.about.com/od/bonds101/a/zeros.htm
The long bonds have less correlation with S&P 500. Typically they do well when stock market is declining and they suffer when stock market is rallying.
They are also subject to interest rate risk. If rates go up, the high duration will hurt the secondary market pricing of these bonds (and the fund must mark to market every day). So, looking at the past few years or even decade you can conclude these bonds are appropriate investment.
I would be cautious in investing in long bonds especially in a fund form. Insurance companies typically buy long bonds in the bond form to meet their long term obligations and they can hold these bonds to maturity. If you are not going to hold long bonds to maturity, my suggestion is to stay away. Use an intermediate duration bond fund instead.
The various replies in this thread pretty much cover the facts about "zeros"; a bond that has value at maturity in "x" amount of time, but that does not pay a current or ongoing yield via a distribution, in the case of a bond fund.
Many of we older folks may have already been involved in "zeros" as a gift to another or gifted to us when we were much younger..........being the good, old plain jane savings bond that could be purchased at a bank or CU. The EE series type is a bond that pays no current yield, is purchased at a discount to face value when it fully matures in the future. This also applies to today's T-bills with a duration of 1 year or less. If one buys such a fund, the value comes from the rotation of the older bills reaching maturity (full value) and constantly being replaced with newer issued T-bills.
This chart compares a few long duration Treasury bonds type funds/indexes.
BTTRX does not vary much from TLT or FLBIX.
Two things about the chart: you may hover the pc mouse at any point on chart line for a particular fund to find it price on a partiuclar date. Also, just below the bottom of the chart, you will find a "slider" for a time line that is currently set at its default of 200 days. You may slide this to the left for a much longer time frame. When doing this you may view a few particular price moves, especially the up moves and note a few days. Upward price changes in and around April/May of 2010 and 2011, and the price move in July, 2011. The first two involved ongoing problems with Greece and the EuroZone. The July/Aug 2011 involved the announcment of the quality downgrade of U.S. debt. Among all of the various upward moves of these funds are a number of announcments from the Fed. Reserve that it would be buying bonds to support their programs. I suspect this support is still in place to hold down longer term rates in the hopes of maintaining low mortgage rates to help stimulate this sector; as it is a known "sick" area of the economy and continues to be a big drag.
Recent Fed announcments indicate a similar support/buying program in the mortgage securities area. I am watching this area to determine moves.
Anyhoo..........I hope looking at the chart helps you see a bit more. Is all of the big fun gone from the long bond area? Perhaps most of it is gone; but traders know there are still many underlying problems, and any baby black swans may continue to allow for "some" positive movement in this area of safe havens.
http://stockcharts.com/freecharts/perf.html?BTTRX,FLBIX,TLT,EDV
Take care,
Catch
You wrote: "I would be cautious in investing in long bonds especially in a fund form. Insurance companies typically buy long bonds in the bond form to meet their long term obligations and they can hold these bonds to maturity. If you are not going to hold long bonds to maturity, my suggestion is to stay away."
I don't follow your thoughts with this statement. Are you suggesting that insurance companies and/or perhaps pension funds, too; hold many of these type of bonds and that somehow affects the investments in this area?
This question is only related to one holding a fund, etf or index that is invested in long term bonds; not individual long term bonds (of which, this house would not do).
Not unlike any investment sector; there is a time and place, an in favor or out of favor for any number of reasons; but I don't understand what may cause "extra danger" to be invested in long bond funds at the appropriate time has to do with the fact that the bonds may also be held by insurance companies.
The accompanying chart suggests the movements are related to Fed Reserve policy notices, interest movements and safe haven demands and ignores who may of may not be holding long bonds.
http://stockcharts.com/freecharts/perf.html?BTTRX,FLBIX,TLT,EDV
In spite of chatter from China or any other soverign holding Treasury issues about U.S. budget/debt problems; at least for 2011, I doubt that there is any disappointment with the stellar returns on long bonds, and is likely one of their best investments for this year.
Regards,
Catch
Right now these type of bond funds are enjoying stellar returns. Due to duration of the bonds, in a reversal of fortunes those could also turn to stellar losses.
Regards-OJ