The first chart captures IEF, 50% UST with 50% cash and 33.33% TYD with 66.67% cash so none of them is leveraged up, we're just keeping the rest in cash. It's a decently long sample size and while the results are not exact, they arguably are close.
If someone wanted meaningful 7-10 year exposure, I do not, they might be able to build around UST or TYD and then have room for stacking alternatives on top of what could be 60/40 notional exposure.
I am very surprised how little differentiation there is. IEF was flat at the start of the study, had a couple of very good years in the middle and then managed futures has been doing a little better lately.
The negative correlation between bonds and managed futures still stands up and while there was some differentiation along the way the closeness of the long term result is a real stunner.
There is still tracking error between IEF and the leveraged versions, no question but I am surprised how little there is. Going forward, the tracking error could be much different, some sort of calamity maybe. I'm never going to put that much into IEF, UST or TYD but if this idea evolves, I probably wouldn't be afraid of 10% notional exposure via one of the levered whether that is 5% to UST or 3.33 to TYD.
TYD's worst two years were 2021 and 2022 when it was down 11.36% and 43.31% respectively. With no rebalancing, if the 3.33% position had been put on at the very start of 2021, it would have been down to 1.67% of the portfolio, essentially cutting in half over the two years, everything else being equal. The odds of another 43% decline in one year are not high but obviously that is not impossible either. Thinking through this, the hit to the portfolio was just 1.67% +/- in the face of a catastrophe in the bond market. Putting a full 10% into IEF at the same time would have been down 8% so the hit to the portfolio would have been 80 basis points.
It is possible that the 6.34% left over from buying TYD could have gone into an alternative strategy that more than made up for the 1.67% hit to the portfolio. That's counterfactual but that is a path to TYD as we're discussing being a good decision. The fact that the TYD exposure all by itself only resulted in being worse off by only 87 basis points versus 10% into IEF is pretty interesting.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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