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Thomas Hepner

ProShares Short 20+ Year Treasury (TBF). Thomas Hepner. Portfolio Performance and Interest Rates. Our portfolio is very correlated with overall performance of stock market Interest rates have been increasing

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Thomas Hepner

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  1. ProShares Short 20+ Year Treasury (TBF) Thomas Hepner

  2. Portfolio Performance and Interest Rates • Our portfolio is very correlated with overall performance of stock market • Interest rates have been increasing • Generally, stock market appreciates when interest rates decline, and depreciates when interest rates rise • This is due to spread between returns of stocks and treasury bonds (risk-free rate)

  3. Effects of Rising Interest Rates on Portfolio • HTA hemorrhaging value – down over 10% • HTA exposed to health care, real estate, and interest rate risk • HTA has huge upswing from Obamacare, but is being crushed by rising rates • I expect HTA to fluctuate in value like it has during the year from Fed announcements with a long term trend downwards until Obamacare is fully implemented

  4. Hedging Against Interest Rate Risk • Hedge by betting that interest rates will rise • How do we do this? • Buy an asset that gains in value as interest rates rise and bond prices fall - Interest Rate Option (can’t purchase this) - Inverse Treasury ETFs

  5. Principles of Inverse Treasury ETFs • “The longer the duration of the bond ETF, the more the ETF will rise or fall in value when interest rates change.” • “Changes in Treasury bond prices often do not lead to a proportional move in corporate bond prices.” • “Leveraged ETFs sometimes do a terrible job tracking moves of the underlying investment.” • Reference: http://www.forbes.com/sites/marcprosser/2012/03/19/using-etfs-to-short-the-treasury-market-read-this-first/

  6. Inverse Treasury ETFs to Choose From • ProShares Short 20+ Year Treasury (TBF) • ProShares UltraShort 20+ Year Treasury ETF (TBT) • Direxion Daily 20+ Year Treasury Bear 3x ETF (TMV) • Direxion Daily 20+ Treasury Bear 1 X Shares (TYBS) • ProShares Short 7-10 Year Treasury (TBX) • ProShares Short High Yield (SJB) • http://www.investopedia.com/stock-analysis/2013/the-top-5-inverse-bond-etfs-tbf-tbx-tmv-sjb-jgbs0204.aspx

  7. What criteria to choose from? • Expense Ratio • ETF with high duration to capture value • Do not want ultra short ETF because of decay over time • Moves roughly opposite of HTA • ProShares Short 20+ Year Treasury (TBF) • Direxion Daily 20+ Treasury Bear 1 X Shares (TYBS)

  8. Performance Comparison – Last 2 Years • Very highly correlated with each other

  9. Comparison with HTA – 1 Year • Inversely correlated with HTA

  10. Other Metrics • ProShares Short 20+ Year Treasury (TBF) • Direxion Daily 20+ Treasury Bear 1 X Shares (TYBS) • Average Volume: TBF (995,000), TYBS (4,185) • YTD Returns: TBF (9%), TYBS (10.9%) • I recommend TBF for liquidity considerations.

  11. Why buy now? • Interest rates at historical low • Yellen will replace Bernanke as Fed Chairman • Fed tapering - on and off (eventually they will do it) • Tapering will result in rises in interest rates

  12. Summary • HTA hemorrhaging value because of interest rates • HTA still provides 5% yield and potential for long-term appreciation, especially from Obamacare implementation • Buying Inverse Treasury ETF, TBF, provides strong profit potential should interest rates rise

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