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We don't see much about these treasury bond derivatives on the TMF boards.

I've just completed an article on them for Foolish Wiki.

http://wiki.fool.com/STRIPs

Your comments, corrections, additions, are invited.
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No. of Recommendations: 1
Paul,

I’d suggest that a re-write of the first sentence of the second paragraph is needed. Rather than asserting without proof that “STRIPS are well suited…”, the honest statement is that “they might be suited to funding specific needs,” and that would depend on a whole host of factors, not the least of which is that buying STRIPS in today’s Zero Interest Rate Environment is more likely to cause losses and tax griefs than not. Take a look at E*Trade’s offering-list for STRIPS below. Why would anyone want to buy these things at their present prices? To get a 3% return from STRIPS, one would have to go out 40 years on the yield-curve. But even a plain checking account will offer 3% on the first $25,000 of deposits. (I’ve got one locally, and I know others are available nationally.) A lot can happen in 40 years, not the least of which will be rising interest-rates that would make buying STRIPS now the ultimate in market mis-timing.

Also, there is the problem of taxes. Treasuries (of any type) are exempt from state taxes only when they are held in taxable accounts, as you say. However, as you also point out, then the implied-interest becomes immediately taxable. But that is going to be a constant aggravation to their already tax-burdened owners, and it amounts to robbing Peter to pay Paul. Yes, a tiny bit of interest is credited to the account, but a nearly offsetting debit is deducted from the owner’s other accounts in the form of a check written to the IRS. But if the STRIPS are held in tax-sheltered accounts (which, I agree, is the best place for them *if* one intends long holding-periods, and it’s where I hold my zeros, be they Treasuries Agencies, Munis, or Corporates), then the tax-advantage is lost. However, a whole bunch of paperwork and tax-grief is avoided each year, and that's an implied cost that zero owners might be willing to pay.

There is one thing for which STRIPS can be well suited that you don’t mention, and that is that they can be excellent trading vehicles. The instrument is liquid, so it’s easy to get in and out of, and serious money can be made if they are bought before interest-rates drop and then sold. Benham (now Am Cent? ) used of offer Treasuries zeros though funds, and in '95 (?) the longest-dated ones returned something in the neighborhood of 55%. That's serious money. Lesser money, but still decent, can be obtained when conditions are right using the 2-year and 5-year notes. I've bought them though Treasury Direct, then later transferred them to a brokerage account where they were sold, and made 13%-15%.

Charlie
------------------------------------
 
Due Price YTM
11/15/12 99.994 0.05%
11/15/12 99.982 0.15%
11/15/12 99.997 0.03%
11/30/12 99.976 0.15%
02/15/13 99.962 0.10%
02/15/13 99.987 0.04%
05/15/13 99.906 0.15%
08/15/13 99.876 0.14%
11/15/13 99.792 0.19%
11/15/13 99.819 0.16%
02/15/14 99.733 0.20%
02/15/14 99.740 0.19%
05/15/14 99.652 0.22%
05/15/14 99.692 0.19%
08/15/14 99.576 0.23%
08/15/14 99.606 0.21%
11/15/14 99.481 0.25%
11/15/14 99.499 0.24%
02/15/15 99.368 0.27%
02/15/15 99.382 0.26%
05/15/15 99.268 0.28%
05/15/15 99.259 0.28%
08/15/15 99.144 0.30%
08/15/15 99.215 0.28%
08/15/15 99.129 0.31%
11/15/15 98.962 0.34%
11/15/15 98.947 0.34%
02/15/16 98.821 0.35%
02/15/16 98.780 0.36%
05/15/16 98.585 0.39%
05/15/16 98.583 0.39%
08/15/16 98.319 0.44%
08/15/16 98.321 0.44%
11/15/16 98.053 0.48%
11/15/16 97.969 0.50%
02/15/17 97.788 0.51%
02/15/17 97.668 0.54%
05/15/17 97.494 0.55%
05/15/17 97.364 0.58%
08/15/17 97.143 0.60%
08/15/17 96.952 0.64%
11/15/17 96.808 0.64%
11/15/17 96.566 0.68%
02/15/18 96.402 0.68%
02/15/18 96.108 0.74%
05/15/18 95.925 0.74%
05/15/18 95.679 0.79%
08/15/18 95.698 0.75%
08/15/18 95.243 0.83%
11/15/18 95.028 0.84%
11/15/18 95.147 0.81%
11/15/18 94.750 0.88%
02/15/19 94.554 0.88%
02/15/19 94.273 0.93%
05/15/19 93.736 0.98%
08/15/19 93.459 0.99%
08/15/19 93.169 1.03%
11/15/19 92.490 1.10%
02/15/20 92.125 1.12%
02/15/20 91.785 1.17%
05/15/20 91.425 1.18%
05/15/20 91.083 1.23%
08/15/20 90.733 1.24%
08/15/20 90.492 1.27%
11/15/20 89.944 1.31%
02/15/21 89.439 1.34%
02/15/21 89.075 1.39%
05/15/21 88.612 1.41%
05/15/21 88.276 1.45%
08/15/21 87.961 1.45%
08/15/21 87.574 1.50%
11/15/21 87.247 1.50%
11/15/21 86.869 1.55%
02/15/22 86.065 1.61%
05/15/22 85.330 1.66%
08/15/22 85.103 1.64%
08/15/22 84.506 1.71%
11/15/22 84.298 1.70%
11/15/22 83.700 1.77%
02/15/23 83.453 1.75%
02/15/23 82.808 1.83%
05/15/23 82.060 1.87%
08/15/23 81.921 1.84%
08/15/23 81.254 1.92%
11/15/23 80.476 1.96%
02/15/24 79.679 2.01%
05/15/24 78.904 2.05%
08/15/24 78.103 2.09%
11/15/24 78.059 2.05%
11/15/24 77.335 2.13%
02/15/25 77.299 2.09%
02/15/25 76.564 2.17%
05/15/25 75.801 2.21%
08/15/25 75.819 2.16%
08/15/25 75.051 2.24%
11/15/25 74.310 2.28%
02/15/26 74.347 2.23%
02/15/26 73.565 2.31%
05/15/26 72.883 2.34%
08/15/26 72.974 2.29%
08/15/26 72.164 2.37%
11/15/26 72.253 2.32%
11/15/26 71.456 2.39%
02/15/27 71.502 2.35%
02/15/27 70.720 2.43%
05/15/27 70.102 2.45%
08/15/27 70.196 2.39%
08/15/27 69.453 2.47%
11/15/27 69.530 2.42%
11/15/27 68.792 2.49%
02/15/28 68.124 2.51%
05/15/28 67.549 2.53%
08/15/28 67.781 2.47%
08/15/28 66.905 2.55%
11/15/28 67.110 2.49%
11/15/28 66.209 2.57%
02/15/29 66.551 2.50%
02/15/29 65.675 2.59%
05/15/29 65.110 2.60%
08/15/29 65.488 2.53%
08/15/29 64.514 2.62%
11/15/29 63.972 2.63%
02/15/30 63.387 2.64%
05/15/30 64.005 2.55%
05/15/30 62.857 2.65%
08/15/30 62.285 2.67%
11/15/30 61.763 2.68%
02/15/31 62.539 2.57%
02/15/31 61.254 2.69%
05/15/31 60.713 2.70%
08/15/31 60.173 2.71%
11/15/31 59.651 2.72%
02/15/32 59.091 2.73%
05/15/32 58.572 2.75%
08/15/32 58.060 2.76%
02/15/33 57.007 2.78%
05/15/33 56.537 2.79%
08/15/33 55.966 2.80%
11/15/33 55.491 2.81%
02/15/34 54.970 2.82%
05/15/34 54.542 2.82%
08/15/34 53.969 2.84%
11/15/34 53.526 2.85%
02/15/35 52.956 2.86%
05/15/35 52.616 2.86%
08/15/35 52.091 2.87%
11/15/35 51.644 2.88%
02/15/36 52.327 2.79%
02/15/36 51.294 2.88%
05/15/36 50.864 2.88%
08/15/36 50.395 2.89%
11/15/36 49.933 2.90%
02/15/37 50.446 2.83%
02/15/37 49.462 2.91%
05/15/37 50.008 2.83%
05/15/37 49.064 2.91%
08/15/37 48.592 2.92%
11/15/37 48.175 2.93%
02/15/38 48.591 2.87%
02/15/38 47.730 2.94%
05/15/38 48.198 2.87%
05/15/38 47.360 2.94%
08/15/38 46.926 2.95%
11/15/38 46.530 2.95%
02/15/39 46.807 2.90%
02/15/39 46.094 2.96%
05/15/39 46.349 2.91%
05/15/39 45.685 2.97%
08/15/39 45.955 2.91%
08/15/39 45.350 2.97%
11/15/39 45.629 2.91%
11/15/39 44.964 2.97%
02/15/40 45.276 2.92%
02/15/40 44.609 2.97%
05/15/40 44.785 2.93%
05/15/40 44.191 2.98%
08/15/40 44.277 2.95%
08/15/40 43.833 2.98%
11/15/40 43.882 2.95%
11/15/40 43.483 2.98%
02/15/41 43.513 2.96%
02/15/41 43.174 2.98%
05/15/41 43.116 2.96%
05/15/41 42.910 2.98%
08/15/41 42.600 2.98%
08/15/41 42.533 2.98%
11/15/41 42.359 2.97%
02/15/42 41.793 2.99%
02/15/42 41.842 2.99%
05/15/42 41.460 2.99%
05/15/42 41.363 3.00%
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Opps. Sorry. Make that 30 years on the yield-curve in order to obtain a 3%.
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just three things for you to look at or ignore:

1. I think STRIPS give you a slightly better yield for the same time frame than the actual note/bond.

2. As a zero, it's a good substitute for re-investing your semi-annual interest payemnts.

3. When interest rates drop, don't long term STRIPS give you a better capital gain than the actual note or bond with the same maturity date?

And...where do you find TINTS?? I've never seen them offerred...(not that I've spent any time looking for them).
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I think STRIPS give you a slightly better yield for the same time frame than the actual note/bond.

Black,

Actually, the differences are even more subtle than that. As the data sets below suggest, it makes a difference whether the derivative in based on 'interest' or 'principal', and whether the notes/bonds are ‘on the run’ or ‘off the run’. But the differences make sense. More implied-risk = more yield.

Charlie
---------------------------------

TYPE CPN DUE YTM
int 0.000 02/15/20 1.167
prin 0.000 02/15/20 1.116
note 3.625 02/15/20 1.080
bond 8.500 02/15/20 1.022

int 0.000 05/15/20 1.231
prin 0.000 05/15/20 1.176
note 3.500 05/15/20 1.132
bond 8.750 05/15/20 1.068
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where do you find TINTS?

My broker sold me TINTs when I did a 401k rollover back in 1989. Eventually interest rates fell and I sold them. (That is why I know about them; that is why they are listed on the Wiki Bonds article.)

There is not much info available on them. They are mentioned in the STRIPs article (linked from the Wiki article) on the Treasury Direct web page, but there is no corresponding TINTs article. That makes me think the institutions that do the STRIPs as derivatives have no trouble finding markets for the TINTs. One suspects they are private placements.
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There is one thing for which STRIPS can be well suited that you don’t mention, and that is that they can be excellent trading vehicles. The instrument is liquid, so it’s easy to get in and out of, and serious money can be made if they are bought before interest-rates drop and then sold.

Liquidity is great. Can they be shorted?
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Can they be shorted?

If you trade them in size. But the easier path is to use futures.
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But the easier path is to use futures.

Easier, but with far higher expense! Need to constantly roll them over. I want an instrument that doesn't require anything. In other words, the great bull bond run from ~1982 till now is probably going to reverse over the next 10-20-30 years. I am looking for an easy way to play that.

And when 30-year treasury rates hit 8, 9, 10, or 13 percent, I'll play the other direction (that is, if I'm still alive at the time). Probably by buying the longest term zeros available and holding till maturity.
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there is nothing worse than speculating on the correct direction a given index/asset will take in the future but being a little too early. i had some great directional bets a few years back and played put options but was too early, missed the move, and lost 100% of the premium i paid for said options.

also remember when vix starts rising, premiums on downside/derivatives shoot up plus if you are trying to give yourself enough time to have the scenario play out you pay additional premium for that as well.

i mentioned the idea of shorting STRIPS in another thread. it sounds very appealing to avoid possible road blocks above and due to the sheer available volume/size/liquidity on a daily basis of STRIPS something to really consider. all brokers are not equal though so in addition to the standard trade commission, make sure you inquire about any carrying costs, etc. at least you are not on the hook for any bond interest with zeroes.

it sounds like charlie is a little partial to futures and that is great. i have dabbled in these as well. everyone should do what is comfortable for them and i am not stating that the only way to play this next big trade move is shorting STRIPS either.

all above discussion is offensive maneuvers. one way to defensively play against the next market move is how you stagger your portfolio. in the last 18 months i made a conscious effort to bail on all long term corps and now i am overweight in short term maturities; in particular the 3-5 year time period. this will allow me the ability to put on potentially new positions as old ones redeem if and when yields finally start going back up again.
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There is nothing worse than speculating on the correct direction a given index/asset will take in the future but being a little too early. I had some great directional bets a few years back and played put options but was too early, missed the move, and lost 100% of the premium I paid for said options.

Yes! That's the problem with using options and futures to accomplish the trade.
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