Is it a good idea to buy bonds with leverage for retail trader?

K

Kust

Recently, I found that if I sell short SHV (short US treasury securities, non-volatile price), I only get charged 0.5% per year. It is about twice cheaper than borrowing money from a broker and keeping a negative cash balance on the account.

Is it a good idea to borrow money in such a way and buy investment-grade corporate bonds that mature in 2-3 years? Currently, those bonds yield about 1.7% per annum. What are the risks? How much will the 0.5% fee change in the event of a panic?
 
So you have found a way to borrow money at an interest rate of 0.5%, and then turn around and lend that money at an interest rate of 1.7%.

What could possibly go wrong?

Ummm... let's see...

What if the interest rate at which you are borrowing suddenly goes way up, but the interest rate at which you are lending does not?

What if the interest rate at which you are lending suddenly goes way down, but the interest rate at which you are borrowing does not?

I suppose you could react by saying, Gee, this isn't profitable anymore, so I guess I'll close out the position...

... at a substantial loss, because the movement in interest rates is going to have a significant impact on the premium/discount on the bonds.
 
Kust said:
Recently, I found that if I sell short SHV (short US treasury securities, non-volatile price), I only get charged 0.5% per year. It is about twice cheaper than borrowing money from a broker and keeping a negative cash balance on the account.

Is it a good idea to borrow money in such a way and buy investment-grade corporate bonds that mature in 2-3 years? Currently, those bonds yield about 1.7% per annum. What are the risks? How much will the 0.5% fee change in the event of a panic?
More...

Also i suppose you are buying at par and not at any premium. And hopefully you wont have to get out of them due to some margin changes in the middle at a discount. After that you will probably end up paying taxes on your gains.. and commisions and spreads probably? a couple of things to think about.
 
Kust said:
Recently, I found that if I sell short SHV (short US treasury securities, non-volatile price), I only get charged 0.5% per year. It is about twice cheaper than borrowing money from a broker and keeping a negative cash balance on the account.

Is it a good idea to borrow money in such a way and buy investment-grade corporate bonds that mature in 2-3 years? Currently, those bonds yield about 1.7% per annum. What are the risks? How much will the 0.5% fee change in the event of a panic?
More...

This sounds interesting but you may want to focus on the downfalls of the borrow leg for now and not the arbitrage trade. Under which circumstances can the cost of borrow go up?
 
Kust said:
Recently, I found that if I sell short SHV (short US treasury securities, non-volatile price), I only get charged 0.5% per year. It is about twice cheaper than borrowing money from a broker and keeping a negative cash balance on the account.

Is it a good idea to borrow money in such a way and buy investment-grade corporate bonds that mature in 2-3 years? Currently, those bonds yield about 1.7% per annum. What are the risks? How much will the 0.5% fee change in the event of a panic?
More...

Which broker is this that would offer you 0.5% per year? The lowest that I could find is 0.75%.
 
Kust said:
Recently, I found that if I sell short SHV (short US treasury securities, non-volatile price), I only get charged 0.5% per year. It is about twice cheaper than borrowing money from a broker and keeping a negative cash balance on the account.

Is it a good idea to borrow money in such a way and buy investment-grade corporate bonds that mature in 2-3 years? Currently, those bonds yield about 1.7% per annum. What are the risks? How much will the 0.5% fee change in the event of a panic?
More...
%%
I would not\ but looks ok thru 2021.
I dont know the details on your loan contract, but the bigger the bank or bigger the gov, the worse deal usually.:D:D I almost always borrowed @ a fixed rate, eve though i did pick a Fed brochure pushing variable RE rates /LOL
 
There are some risks with being in a short position so you'd have to add an average cost and volatility calculation for that. If the stock doesn't trade for a period of time you are required to pay whatever borrow rate the market comes up with until it trades again. That risk seems low but it isn't zero.
 
This is a way to make pennies if everything is stable and lose big in case of an important change. Similar to selling out of the money options premium.
Riskless arbitrage opportunities have pretty much disappeared, as far as I know. In this case it seems to me that if the Fed hikes aggressively, you lose big.
 
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