Whoops-a-Daisy!

I usually would rather learn about something by doing it. Don't read instructions, don't ask advice, don't take classes, don't research.... Just Do It! Well, I'm not actually that extreme.

However, that pretty much characterized my first foray into the bond market earlier this month. I bought $3,000 of 2-yr bills. My thinking was that the bills would strengthen with a flight-to-safety trumping the bad fundamentals of massive supply. A low VIX/fear index showed me that there was plenty of room for sentiment to turn frightened.

My rough idea was that if the yield fell from 2.91% to about 2.5% I would make about 15%. While my timing over the last three weeks was impeccable, my calculations were moronic. That's not how you calculate profit on bonds. The 2.91% was a yield-to-maturity calculation. The change in bond price determines profits (aside from interest). I closed the position today with the two-year yielding 2.62%.

Here's how the calculation works: the underlying price of the bond rose 0.29% as the yield fell 0.29%. So the profit on $3,000 worth of bonds was 0.0029 X 3,000 = profit gained per year of interest paid above the current rate = $8.70. This was a 2-yr Treasury, so profit was $17.40.

Measly. And that's why I sold this bond (gaining just over 2% including interest) and bought $6,000 in 30-yr Treasuries. The VIX still has a long way to go. The dollar is being supported at these levels. And finally, unemployment is announced on Thursday. Each bip (basis point, 0.0001) the yield drops, is an $18 profit (or loss if bonds sell off.)

This position gives my portfolio an overall duration of 5, instead of 0.34. If I had started off with my new position, I'd have made $468 instead of $17.

I can't complain. I just made $17 to learn how to speculate on Treasury bonds.