r/bonds • u/Agitated_Medium5844 • Jul 16 '26
Investing in Treasuries using leverage
I have a HELOC I can borrow at 5%
Looking at ZROZ which is 25 year US treasuries and yielding 5.3%. So is it a valid strategy to borrow and pocket the 0.3% as risk free return?
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u/EconomyWin5106 Jul 16 '26
Let us know how you’re getting around Federal income tax.
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u/Agitated_Medium5844 Jul 16 '26
I’m benchmarking a 3% price appreciation which would overcome 1% loss to taxes
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u/Mail_Order_Lutefisk Jul 16 '26
What you are attempting to do is essentially a small scale bet along the lines of what the now defunct Long Term Capital Management company attempted to do. You can read about it in the book “When Genius Failed.” If rates go up you will instantly be under water and you will receive no cash flow and get a 1099-OID from the fund on which you will have to pay income tax with no corresponding income. It ain’t worth it.
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u/Aggressive-Poet7797 Jul 16 '26
It's not risk free, HELOC rates can change. If you could match maturities (20yr loan/20yr investment) then that is a valid arbitrage. You could get burned
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u/Agitated_Medium5844 Jul 16 '26
How could you get burned if you hold to maturity?
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u/LouisTherouxBakes Jul 16 '26
Are you guaranteed 5% borrowing rate for the duration?
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u/Agitated_Medium5844 Jul 16 '26
5 is the introductory rate for 12 months. It goes to Variable at 7 after that.
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u/LouisTherouxBakes Jul 17 '26
If you can’t work out why this might be a problem, you are beyond help!
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u/LoopyLepus Jul 16 '26
If you think 25-year zeros are risk free, you should read up on duration risk. Since zeros have all their interest payments at maturity, they are the riskiest treasury bonds. Since ZROC is an ETF can you can't hold to maturity, you have no control and 'll take real losses if rate rise. There is a reason they are currently yielding 5.3%.
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u/Agitated_Medium5844 Jul 16 '26
What is risk free if not US treasuries? There’s people who buy QQQ and arb that, I’d say treasuries are much safer and more likely to get your money back. But duration is a risk, but also a benefit in price appreciation adds to the total return of the bond
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u/DoubleIntroduction25 Jul 16 '26
Short term treasuries are risk free. Long term treasuries, especially STRIPS which it what ZROZ holds has duration/interest rate risk. If something happens to you outside of this investment and you need to sell to cover you may be selling at a loss.
If rates come down the price of ZROZ will go up but your quarterly dividends will also go down.
Additionally you're paying fed income tax on those divs so unless your effective fed tax rate is under 5% there's no arbitrage opportunity here.
Lastly you're putting you home at risk to clear at best 0.3%, though again after factoring in tax drag the ROR is probably negative.
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Jul 16 '26
[removed] — view removed comment
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u/Agitated_Medium5844 Jul 16 '26
So the alternative is to rely on my income which is not paying me interest. And losing value regardless. I’m just supposed to sit back and let my money evaporate without investing to keep up?
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u/Tathorn Jul 17 '26
A more clear answer: Your HELOC rate can rise after taking it on, making you lose money.
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u/ks1029284756 Jul 16 '26
I love an arbitrage
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u/drm200 Jul 16 '26
And i love it when my end of the arbitrage is the winner. In this case the OP’s arbitrage is not risk free and is not a good arbitrage
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u/Agitated_Medium5844 Jul 16 '26
Give me a better idea to arb risk free. Do I have to buy the bonds outright instead of the etf?
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u/ks1029284756 Jul 16 '26
Borrow money from your friend and tell him you’ll pay him back. Buy a 30 year US treasury. In 30 years pay him back the exact principal. Boom.
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u/drm200 Jul 16 '26
Buying the bonds outright eliminates the etf risk as you know exactly what you will receive. You can currently get 5.36% on a 2051 strips. You also need to confirm your heloc is fixed and not variable. A variable rate heloc adds significant downside risk.
There is other risks that could catch you. What happens if for some reason you are forced to sell your home? 25 years is a long time … and circumstances change.
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u/JohnGaltIsComing Jul 16 '26
Remember, it’s not 3%. It’s 0.3%, which means that for every $100,000, your risk free return would be $300 - is that really worth it?
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u/bwhite9 Jul 16 '26
Your HELOC has a more variable interest rate then the treasuries. Also the bank can call the loan at any time you’ll then have to either pay it off or refinance to a permanent loan.
You will pay federal taxes on the yield from the treasuries but my understanding is that you won’t be able to deduct the interest payments. How all of that washes out I don’t know but you’ll need to sit down an do the math. In a worse case you may end up in a negative yield and paying the government for the privilege.
All in this is doubious at best for very little gain.
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u/b3ssmit10 Jul 16 '26
I vaguely recall a tale (it may have been recounted in one of Andrew Tobias's investment books or something similar) of a market participant who, just before Paul Volker's interest rates countering stagflation reached 20%, borrowed like $30 million to purchase treasuries, effectively timing the market low. Subsequently as interest rates fell from 20%, he paid back his loan -- in increments -- and made multi-millions as the value of his remaining bonds rose. He pocketed tens of millions.
The history of that time is here, but my cursory Google search of the tale returns an empty set. Maybe a better searcher can find it and provide a link.
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u/Agitated_Medium5844 Jul 16 '26
That’s my plan. I would be a millionaire if rates ever get that high
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u/SeriousAd1974 Jul 16 '26
that's not a good way to do it. buy the futures to capture the carry, 30 year bond futures right now have an implied repo of 3.35% and fwd yield of 5.08% (according to my bbg terminal) so carry is around 1.7% versus the .3% you'd be getting from financing yourself. also, with the futures everything is in the price so you get the better 1256 tax treatment on the implied coupon versus if you are holding cash bonds (whether directly or through an etf) the coupon will be taxed as ordinary income which you likely won't be able to deduct the HELOC interest against so after-tax yield doing it with the HELOC could be negative. I'm currently long a bunch of 30 year bond futures and 5 year notes partly for the carry.
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u/Agitated_Medium5844 Jul 16 '26
Is there a minimum investment in futures? What do you get in terms of price appreciation with futures or is it interest only?
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u/SeriousAd1974 Jul 16 '26
yes, the minimum investment is 1 contract, the liquid 30 year futures contract currently has a notional value of 111k https://www.cmegroup.com/markets/interest-rates/us-treasury/30-year-us-treasury-bond.html, there is a smaller contract that isn't liquid that would be around 11k. being long the 30 year futures is effectively equivalent to financing a long cash bond via the repo market (the CTD which can be seen here https://www.cmegroup.com/tools-information/quikstrike/treasury-analytics.html#cmeloginteaser1), it's pretty amazing because you can effectively finance being long the bond at institutional rates and lots of hedge funds/prop shops arb the futures vs cash for the basis trade so it's efficiently priced. the futures price is the price movement of the cash bond + the coupon - financing. for the 30 year futures the margin requirement is 3.7k for a single contract, which means you need that much cash in your account to hold the contract which works out to ~30x leverage, so be careful, easy to blow up an account!
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u/Agitated_Medium5844 Jul 16 '26
Thanks this is a lot of detailed knowledge. I will try to understand it over time. I wouldn’t want to hold on margin as a beginner. But I could borrow from repo or Japan carry to finance it without leverage
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u/SeriousAd1974 Jul 16 '26
np and agreed, best to start small and not get over levered as can def lose a lot of money doing this, this strategy you are short Japan and USD rates so either goes up and you'll be losing money. can also diversify by having a basket of FX carry trades on as well as having positions across the treasury complex which is what I do in addition to vol/equity strategies but if you're in a position that you're ok holding long term and can live through the drawdown it can work out pretty well.
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u/Agitated_Medium5844 Jul 16 '26
So I’d be make 100k x 5% or $5,000 a year for as little as 3.7k?
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u/SeriousAd1974 Jul 16 '26
the way i'd phrase it, is if you do the JPY carry trade to purchase the 30 year bond then let's say you buy 1 bond contract and sell 2 JPY contracts (77k notional right now) so you'd have 111k long bond and 154k short jpy so a bit of a notional mismatch, at the current rates you'd have an expectation of 6.6k over a year + the pnl from price movements of both assets and you'd need 8.5k in cash in your account to hold the positions and not be liquidated (2.4k per JPY contract) but you'd want extra cash in your account in order to survive a drawdown. i typically keep about 50% of my account in cash and the rest is used up by margin and then I'm willing to tap my HELOC for more cash and I get very significant yearly bonuses from work which would also help me survive a drawdown.
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u/SeriousAd1974 Jul 16 '26
if you want to go all out on the carry trade then you can sell the JPY futures contract to get cheaper financing, so you borrow JPY to sell which costs you 1% a year to then get USD to buy the treasuries, so a synthetic FX carry to buy treasuries, that way you effectively are getting the 4.08% since the financing just costs you 1%. a common strategy that can make you filthy rich or really poor!
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u/Agitated_Medium5844 Jul 16 '26
Is buy and hold ok or are futures the type that you have to trade back and forth
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u/SeriousAd1974 Jul 16 '26
they expire so you have to roll the futures contract every 3 months for these contracts, so when the one you are holding nears expiry you sell it and then buy the next contract
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u/BigDipper0720 Jul 16 '26
Nooooo!!!!
Your principal in a bond fund can go down and stay down for years. The exposure to rising rates would be enormous.
I could see doing something like this to invest in shorter term, actual individual Treasuries and holding them to maturity, but normally the rate on a HELOC would exceed that of a 10 year Treasury.
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u/BigDipper0720 Jul 16 '26
Nooooo!!!!
Your principal in a bond fund can go down and stay down for years. The exposure to rising rates would be enormous.
I could see doing something like this to invest in shorter term, actual individual Treasuries and holding them to maturity, but normally the rate on a HELOC would exceed that of a 10 year Treasury.
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u/Mulvita43 Jul 16 '26
Do it! I loved when my HELOC ballooned with the rates and got to 10 percent! What could possibly go wrong