Hedging 7-10 year Treasure bonds with Barclays’ DTYS

This morning I took the plunge, buying equal amounts of IEF (93.10) and DTYS (52.95) this morning, with the goal of getting a low risk return of 1.7% annualized return or better.   Before I bought I was surprised / dismayed to see that DTYS had fallen more per share than IEF had risen—casting doubt on my planned 1:1 hedging ratio.   I looked back at the historical data and satisfied myself that this is typical, the day to day tracking of IEF to DTYS isn’t all that great, but it averages out over to be a good hedge over the course of a week or two.

Because I don’t expect interest rates to drop significantly I sweetened the yield by selling April S94 IEF calls for 0.45.   Sum of IEF+DTYS price was 146.05.


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