Need help figuring out bling spots and risk in this trade

M

Matt_K74

With interest rates getting higher - I'm looking at 3 month US treasuries, specifically 912796ZK8.
Let's say it has a Yield of ~ 3.55%.
Interactive Brokers requires 1% margin on this.

Let's say I have a home loan of 2 million with 3.75% interest.
Why wouldn't I buy 4 million of this Bond, hold to maturity (3 month) - have my trading account reduce my buying power by 40.000$ (I have lots of excess capital in my IB account) and make it pay for my mortgage? Assuming the US is not going to default or collapse in 3 month - where's the risk?
 
IMO looks sound the idea & the calcs.
Maybe a bond expert can tell more.

Just the current timing is not that ideal, IMO, b/c of the uncertainty with the Midterms in Nov...
B/c the yield is a variable rate, as I understand it (I'm not a bondie :))
 
Matt_K74 said:
With interest rates getting higher - I'm looking at 3 month US treasuries, specifically 912796ZK8.
Let's say it has a Yield of ~ 3.55%.
Interactive Brokers requires 1% margin on this.

Let's say I have a home loan of 2 million with 3.75% interest.
Why wouldn't I buy 4 million of this Bond, hold to maturity (3 month) - have my trading account reduce my buying power by 40.000$ (I have lots of excess capital in my IB account) and make it pay for my mortgage? Assuming the US is not going to default or collapse in 3 month - where's the risk?
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NOT much risk most likely/and assume its a fixed rate mortgage.
An adjustable rate mortgage has plenty of risk;100% of foreclosures are caused by debt.
Me/ i much prefer a paid for home /even though i 've had plenty of mortgages, most fixed, a few adjustable.
S&P+ rightly downgraded US debt years ago\no wonder US DOJ sued them \ how dare you tell the truth S&P ??
I've also rented a bit, [+ fixed up rentals]no way i do that again:caution::caution:
 
Matt_K74 said:
With interest rates getting higher - I'm looking at 3 month US treasuries, specifically 912796ZK8.
Let's say it has a Yield of ~ 3.55%.
Interactive Brokers requires 1% margin on this.

Let's say I have a home loan of 2 million with 3.75% interest.
Why wouldn't I buy 4 million of this Bond, hold to maturity (3 month) - have my trading account reduce my buying power by 40.000$ (I have lots of excess capital in my IB account) and make it pay for my mortgage? Assuming the US is not going to default or collapse in 3 month - where's the risk?
More...

so you invest $40,000 at 3.55% well that's gonna make you $1420 per year. your mortgage payment is probably that much every month. so that's where the problem is.
 
He will be making 3.55% on 4 million, not on 40,000. It's a nice chunk of change.

But, there shouldn't be any confusion whether he has a perfect hedge or not. Gotta be aware of basic concepts such as duration risk and the present value of mortgage payments when rates change.

But what the hey, make your bets.
 
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Caution OP: is the 3.55% yield rate really for just the 3 months, or is it rather the annualized yield rate for the 3 months?
If it's indeed the annualized yield rate, then your profit in 3 months would be 0.87592400524595305500%
BUT still: since you invest just $40k, and make a profit of $35,036.9602 (on the $4M), then your net profit is 87.59240052459530550000% in 3 months, and annualized 1,138.40%, if my calcs are correct... :)
So, double- and triple-check everything...
Also check any possible max limits at the broker...
 
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xandman said:
He will be making 3.55% on 4 million, not on 40,000. It's a nice chunk of change.

But, there shouldn't be any confusion whether he has a perfect hedge or not. Gotta be aware of basic concepts such as duration risk and the present value of mortgage payments when rates change.

But what the hey, make your bets.
More...

op did say he had alot of excess capital lying around in his account. better hope so because if his position moves against him by 1% he wiped out his $40,000. not sure at what point ib would step in and start liquidating his assets but i bet he would be hoping they wouldn't touch his t-bills first...
 
betcashrun said:
[QUOTE="Matt_K74...
Don't forget IB will charge interest on margin loans. Assume you have USD 1 million cash and buy bonds for USD 4 million, you will be charged on USD 3 million at roughly benchmark + 0.75% (cf https://www.interactivebrokers.com/en/trading/margin-rates.php) i.e. now 3.08% and tomorrow 3.83%.
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Are you sure about this?

https://www.interactivebrokers.com/en/trading/margin-bonds.php

The way I'm reading this is you're putting up 1% of the notional for the trade (your buying power gets reduced by that) - similar to how you put up 5 grand or whatever for a E-Mini but you control 180 grand of notional.
 
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