Is TLT (20 yr bond index) self hedging?

[HFStartup]

Quote from Eliot Hosewater:

Try looking at a chart of TLT price/20 year yield and see if there is much correlation. TLT did run up to 120 or so for a short time around 2008/2009 and then fell back down.

As per your suggestion, I calculated the correlation between TLT and the 20 Year Daily Treasury Yield Curve Rates. The data ran from 7-31-2002 to 6-10-2011. The correlation was -.87864 indicating a strongly uncorrelated relationship. Shouldn't there be a strong correlation here?

I also checked the correlation on the adjusted close for TLT and the dividends paid during the period beginning 10-1-2002 and ending 6-1-2011. The correlation was -.2567 indicating no significant correlation or lack of it.

Thanks.

 

[psytrade]

I don't know enough about those daily numbers to offer anything with that in mind... - but the average duration of TLT portfolio was like 28 years last year... so you should use the 30 YR tbond to check it against

http://www.cmegroup.com/trading/interest-rates/us-treasury/30-year-us-treasury-bond.html

 

[intradaybill]

Quote from HFStartup:

As per your suggestion, I calculated the correlation between TLT and the 20 Year Daily Treasury Yield Curve Rates. The data ran from 7-31-2002 to 6-10-2011. The correlation was -.87864 indicating a strongly uncorrelated relationship. Shouldn't there be a strong correlation here?

Which correlation did you calculate? A rolling one? What period?

FYI price and yield as inversally related so that a -.87 is a very high correlation. Maybe you shoudl read some intro to bonds. Bonds is a mathematical subject.

 

[Soon2Bgreat]

Quote from HFStartup:

Let me rephrase the question...

How can the TLT ETF have a 48% annual turnover on an investment that requires such a long term commitment (20 years)?

Thanks.

It might help if you think of duration as a bond's price sensitivity to interest rates similar to an option's delta rather than a term to maturity.

TLT's turnover may be attributable to maintaining a target price sensitivity given changing market conditions (though I can't say for sure).

 

[zdreg]

http://us.ishares.com/product_info/fund/overview/TLT.htm?fundSearch=true&qt=TLT

unfortunately this pages does not provide the answer. it only shows that the avg. maturity is 28+ yrs.

 

[psytrade]

Like 30yrs roll every 3 months I think right?!?... so the turnover in the fund would be dependent on the futures contracts, no?

 

[zdreg]

there is an underlying index from barclays which tlt is supposed to track. the question then becomes why is there a big turnover in the index.

 

[HFStartup]

Quote from intradaybill:

Which correlation did you calculate? A rolling one? What period?

FYI price and yield as inversally related so that a -.87 is a very high correlation. Maybe you shoudl read some intro to bonds. Bonds is a mathematical subject.

Intradaybill,

I calculated the correlation for the entire period of data which ran from 7-31-2002 to 6-10-2011. I did not break it down into periods or roll it because at this point, I am just trying to get a sense of the big picture. To make the calculation, I used the correl() function in excel and used the adj closing price of TLT and the Daily Treasury Yield Curve Rates for the 20 year bond as arrays.

As you can probably tell from this thread, other than using TLT as a hedge for the general market in my fund for the past 6 months (for which it has been great), I am new to bonds. Obviously, if rates go up, and TLT goes down, it won't be such a great hedge and that is why I am asking the question now.

I posted this thread because I want to better understand the effect rising interest rates will have on TLT. Based on the comments of the contributors of this thread, the general consensus seems to be that TLT is not self-hedging, but if that is the case, there must be another factor that has to offset the turnover and the new interest rates this should capture...Many suggetsions have been made and I am researching them.

My plan at this point is to attempt to contact the ishares Barclays management team and pose the question to them. If I can get through to someone, I will post their response on this thread.

Thanks again to everyone who has contributed to this thread!!!

 

[HFStartup]

Quote from Soon2Bgreat:

It might help if you think of duration as a bond's price sensitivity to interest rates similar to an option's delta rather than a term to maturity.

TLT's turnover may be attributable to maintaining a target price sensitivity given changing market conditions (though I can't say for sure).

Thanks Soon2Bgreat; that's a great analogy.

 

[HFStartup]

OK, so here it is...

I just got off the phone with an Ishares Barclays representative who told me the following:

1.) TLT is NOT an actively managed fund.

2.) TLT rebalances every month which accounts for the 48% annual turnover. Positions are bought and sold to maintain a close representation of the underlying and is comprised of bonds with maturities between 20-30 years.

3.) TLT pays out the yields it receives to holders of TLT (minus fund costs).

4.) As new positions are acquired, and due to the inverse nature of bond cost versus yield, TLT WILL reflect the yields of the newly acquired bonds. Therefore there will be a lag as current bond yields held by TLT are averaged with the yields of newly acquired bonds. In other words, as interest rates rise, TLT's price may fall, but the yield will also rise.

Based on this information, it looks like my original theory that TLT is self-hedging is correct. In my opinion, this would make TLT a very valuable tool for fund managers because not only does it hedge the markets through its inverse correlation as a bond based fund, but it also hedges against price falls within itself by compensating with increasing dividends. All this with great liquidity! So now I am asking myself what is the downside, because there is ALWAYS a downside...

Hope this helps.