TLT - Why Is Income from Govt Obligations so LOW?

Discussion of the Bond portion of the Permanent Portfolio

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jco
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by jco » Thu Mar 29, 2012 9:07 pm

moda0306 wrote:when it comes to markets / capitalist system, i think the way operators take notice is thru buy/selling...
LOL, of course... With a cooler head I can shake my head in embarrassment at my earlier comment, as I'm sure HB would have done.

Plans are in place to decouple from TLT and move into mostly actual bonds, the remainder into competing ETFs... I hope iShares feels us moving away.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by moda0306 » Sat Mar 31, 2012 1:25 pm

I wonder who the main investors of TLT actually are?  To us with TLT in our IRA's, it's not that big of a deal, but are wealthier people with advisors really having their clients invest in treasuries through TLT and incur the state tax?
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by Xan » Sat Mar 31, 2012 7:05 pm

moda0306 wrote: I wonder who the main investors of TLT actually are?  To us with TLT in our IRA's, it's not that big of a deal, but are wealthier people with advisors really having their clients invest in treasuries through TLT and incur the state tax?
Well, many folks (like myself) live in states with no income tax.
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WildAboutHarry
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by WildAboutHarry » Sun Apr 01, 2012 8:16 am

Xan wrote:Well, many folks (like myself) live in states with no income tax.
While that takes care of the state tax problem with TLT in taxable for those so blessed, if half of the income from TLT is derived from non-treasury sources, but they are priced to yield like treasury bonds, where does all that extra money go?

In other words, is I-Shares making money on securities lending and other securities jiggery pokery on the treasury holdings to collect fees in excess of the treasury yields and then paying out enough to shareholders just to match applicable treasury yields?  And pocketing the difference?
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by rickb » Mon Apr 02, 2012 2:09 pm

WildAboutHarry wrote: ... if half of the income from TLT is derived from non-treasury sources, but they are priced to yield like treasury bonds, where does all that extra money go?

In other words, is I-Shares making money on securities lending and other securities jiggery pokery on the treasury holdings to collect fees in excess of the treasury yields and then paying out enough to shareholders just to match applicable treasury yields?  And pocketing the difference?
Nothing more than a complete guess - but I'd imagine they can't pocket the difference without reporting it as fees.  On the other hand (still guessing) I wouldn't be in the least surprised if the treasury loans are indirected through a subsidiary that charges fairly exorbitant fees letting the fund report a profit from its lending operation (effectively reducing the fund's reported fees) - while allowing the subsidiary to siphon off as much of the "excess" interest as they want.  On paper this would be a win-win - the fund reports better interest and lower fees than it otherwise would (enabling the fund to match any low-cost provider's [cough**Vanguard**cough] fees), and the subsidiary makes a tidy profit.

Rather than continue to guess about all this, it would be good if someone who knows about this kind of stuff could look into it and let us know what they find.  It all has to be above board and reported someplace, right?
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by moda0306 » Mon Apr 02, 2012 2:14 pm

rickb,

I, like you, can't wait for somebody to bust open this gravy train.  I just know if I call i-shares it'll take forever to get the bottom of this, if it's even possible.

Someone here has to have some financial connections.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by WildAboutHarry » Tue Apr 03, 2012 7:23 am

rickb - I think your hypothetical sounds like a very reasonable scenario.
It is the settled policy of America, that as peace is better than war, war is better than tribute.  The United States, while they wish for war with no nation, will buy peace with none"  James Madison
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by Pointedstick » Tue May 29, 2012 5:45 pm

Was there ever any resolution on this? I just happened to buy a bunch of TLT and I'm getting a tad nervous.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by Tyler » Tue May 29, 2012 7:50 pm

I personally see no reason to lose sleep over TLT at this point.  Yes, they have non-treasury income that could result in an unexpected state tax bill.  Yet while it surely has more risk than treasuries through Treasury Direct I have seen nothing to make me believe it is high risk overall.  

Going back to some of Craig's recent posts, I'm personally more worried about putting all my money in the iShares basket than about TLT individually.  Spread your money among different companies and you'll build healthy firewalls for counter-party risk even for the funds you're 100% convinced are safe right now but may have issues tomorrow.

Even direct treasuries through Fidelity may not be the safest plan if you're also counting on FDLXX and FSTMX, for example.  
Last edited by Tyler on Tue May 29, 2012 7:52 pm, edited 1 time in total.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by rickb » Sat Jun 02, 2012 7:02 pm

In their 2012 Annual Report (see Note 5)  iShares says

1. They lend to approved borrowers (brokers, dealers and other financial institutions).  They don't say exactly who.

2. The borrower puts up collateral consisting of cash, an irrevocable letter of credit, or securities issued or guaranteed by the U.S. government in an initial amount of 102% of the current value of what they borrow, maintained at a value of at least 100% of the current value of what's borrowed.  

3. They may reinvest the collateral in "certain short-term instruments ... in one or more joint accounts or money market funds, including those managed by BFA [Black Rock] or its affiliates.  Each Fund could suffer a loss if the value of an investment purchased with cash collateral falls below the value of the cash collateral received."

4. As of Feb 29, 2012 any securities on loan were collateralized by cash, and the cash was invested in money market funds managed by BFA.  They don't say exactly which money market funds.

5. Securities lending income (reported elsewhere in the report as $1.5M) is the income earned from the investment of the cash collateral, net of fees and other payments to and from borrowers, and less the fees paid to BTC [Black Rock] as the lending agent.

Elsewhere, they say about $1B of the $4B of TLT's net assets are currently loaned.

Also elsewhere (Note 2), they say the lending agent fees are 35% of the income derived from lending, and were $823K.

The bottom line seems to be that 25% of TLT's assets are actually invested in money market funds, but they collect all of the bond interest plus 65% of the interest the money market fund is paying.

[edit: $1B of $4B, not $1T of $4T]
Last edited by rickb on Sun Jun 03, 2012 12:11 pm, edited 1 time in total.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by Tyler » Sat Jun 02, 2012 7:27 pm

Thanks for the info.

So the biggest risk seems to be the credit risk of the money market funds in a major economic nosedive.  That's certainly a risk (there's a reason HB advocated treasury MM funds), but less so than other investments they could have screwed around with.  Any idea what kind of insurance may be in place for that portion of the money if there wan an issue with the MM fund?  

EDIT: Digging through the annual report, the primary money market fund used is "Blackrock Cash Funds: Institutional, SL Agency Shares".  Just in case that means anything to anyone here.
Last edited by Tyler on Sat Jun 02, 2012 8:46 pm, edited 1 time in total.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by rickb » Sat Jun 02, 2012 8:44 pm

Tyler wrote: Any idea what kind of insurance may be in place for that portion of the money if there wan an issue with the MM fund? 
Guessing, I suspect the answer is none.  On the other hand, many fund families are extremely reluctant to let their MM funds "break the buck" so in all likelihood this would be an event where Black Rock was in serious trouble - but avoiding this same risk is kind of the point of using treasury backed MM funds for the PP's cash portion.
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