TLT if yields go negative

[Tsing Tao]

Pardon the question if you feel it is naive. What happens to TLT if NIRP is introduced? Before you slam the hell out of me, I understand that if NIRP is introduced it doesn't necessarily mean duration will go negative, but lets just - for shits and giggles - say that everything out beyond 20 years DID go negative. What happens to TLT? What happens to it as duration approaches zero?

I'm assuming the monthly coupon paid to holders of the ETF becomes a monthly charge?

 

[Real Money]

I'm assuming the monthly coupon paid to holders of the ETF becomes a monthly charge?

LOL

 

[Specterx]

Pardon the question if you feel it is naive. What happens to TLT if NIRP is introduced? Before you slam the hell out of me, I understand that if NIRP is introduced it doesn't necessarily mean duration will go negative, but lets just - for shits and giggles - say that everything out beyond 20 years DID go negative. What happens to TLT? What happens to it as duration approaches zero?

I'm assuming the monthly coupon paid to holders of the ETF becomes a monthly charge?

AFAIK in practice and to date, negative yields on bonds hasn't meant that the holders of the bonds actually pay a coupon - rather the bond is issued above par with a zero coupon, so at maturity you receive back less than what you paid.

For instruments like TLT, from the holder's viewpoint this means a dividend yield of zero and a steady decay of NAV per share - but not actually a "negative dividend".

 

[Tsing Tao]

LOL

This is funny because it happens or funny because I thought it would happen?

 

[Tsing Tao]

AFAIK in practice and to date, negative yields on bonds hasn't meant that the holders of the bonds actually pay a coupon - rather the bond is issued above par with a zero coupon, so at maturity you receive back less than what you paid.

For instruments like TLT, from the holder's viewpoint this means a dividend yield of zero and a steady decay of NAV per share - but not actually a "negative dividend".

Thanks for the explanation, and not just throwing out a "LOL". What do you believe happens to the ETF price as yield approaches zero?

 

[Specterx]

Thanks for the explanation, and not just throwing out a "LOL". What do you believe happens to the ETF price as yield approaches zero?

Not sure I'm getting your meaning - ETFs are a derivative and their share prices (in an efficient market) reflects changes in NAV per share, which is determined by the market value of the assets it holds (Treasury bonds in this case). ZIRP should mean greatly reduced volatility in T-bond yields and therefore prices. If longer term bond yields really do go negative and stay there for a number of years, the price of TLT will start to decay steadily (reflecting the drain from mgmt fees, plus the yield-to-maturity losses from paying say $102 for a bond and only getting $100 back). After a long enough time (many years) this will presumably necessitate reverse splits.

 

[Tsing Tao]

Not sure I'm getting your meaning - ETFs are a derivative and their share prices (in an efficient market) reflects changes in NAV per share, which is determined by the market value of the assets it holds (Treasury bonds in this case). ZIRP should mean greatly reduced volatility in T-bond yields and therefore prices. If longer term bond yields really do go negative and stay there for a number of years, the price of TLT will start to decay steadily (reflecting the drain from mgmt fees, plus the yield-to-maturity losses from paying say $102 for a bond and only getting $100 back). After a long enough time (many years) this will presumably necessitate reverse splits.

Got it, I think you answered in the first response but clarified in the second (or i was really dense and didn't get it until the second response). I appreciate you taking the time to explain it.

 

[MKTrader]

If longer term bond yields really do go negative and stay there for a number of years, the price of TLT will start to decay steadily (reflecting the drain from mgmt fees, plus the yield-to-maturity losses from paying say $102 for a bond and only getting $100 back). After a long enough time (many years) this will presumably necessitate reverse splits.

It's worth noting we had ZIRP (Fed Funds rate between 0.00 to 0.25 like now) for almost 7 years (the real reason, along with lots of QE, for the Obama bull market). During this time (late 2008 to 2015) TLT actually moved up about 30%, albeit with some ups, downs and volatility.

Many people feared NIRP during that time but it never happened in the U.S. That doesn't mean the same thing will happen again--especially with TLT's current sky-high price and the fact we pushed the ZIRP/QE boom so many years already...but you just never know.

 

[NewTraderAdventure]

Thanks for the explanation, and not just throwing out a "LOL". What do you believe happens to the ETF price as yield approaches zero?

nothing 'happens'

are you expecting an explosion ?