It is a highly protective asset that helps diversify portfolio risk. It has a long-term statistical bias and is particularly tempting to place in a portfolio. By statistically analyzing the price history (2003 - today) we can consider ourselves in a position of extreme advantage at this moment. During the entire life cycle of the product we can see how the historical maximum drawdown has never exceeded -28% in 800 days. On average, during each drawdown this asset loses 22% of its value in 650 days (approximately). The recovery period (period during which the market recovers the lost ground) is equal to 0.45. This means that on average it takes half the time to recover its losses compared to the time it takes to depreciate. From March 2020 to today it has been within a maximum distance of -25% from the maximum price, exceeding 500 days in drawdown.
Statistically we are in a situation where the chances of further loss of value are very low (in your entire life you have never lost more than 28%). Following the statistical model, it is likely that it will recover its value in less than a year.
If we assume that we are close to a minimum level and that the long term is characterized by a strong upward statistical bias, combined with the fact that the world economic situation is still far from an official recovery and that it will have to wait a little longer before to raise rates, positioning on $TLT is an excellent medium / long term opportunity for part of the core structure of my portfolio.
Let's analyze the data:
- Standard Deviation 10Y = 0.90%
- Standard Deviation 5Y = 0.87%
- Standard Deviation 3Y = 0.83%
The riskiness of the product decreased by about 10% from 2010 to today.
- 10Y yield = + 7%
- 5Y yield = + 3%
- 3Y yield = + 8%
- YTD yield = - 10%
The returns are positive in the medium / long term and negative in the short term (-10% from the beginning of the year).
Correlation: Instrument inversely correlated with the unemployment rate. As the unemployment rate increases, the value of the instrument decreases and vice versa. If we assume that the US is slowly returning to pre-employment at the pre-Covid19 level (thus the unemployment rate is decreasing over time) then we can assume that our tool will appreciate in the medium / long term.
- 3Y Expected Return: + 21%
- Max loss (with hedging): 5%
- Max portfolio loss (in the event that the outcome of this core transaction does not go according to estimates): -0,75%
- % of equity to be dedicated to this operation: 15% of the total portfolio + 7.5% for any hedging = 22.5% of the total portfolio
- Risk /Return = 1:4
Over time, three different situations can arise:
A) Closing the long trade at a loss and closing the hedge in profit, then:
- Potential loss% on the portfolio: - 0.75%
B) Closing the hedging at a loss and profit of the long operation, then:
- Potential gain% on the portfolio: + 2.25%
C) There is no need for the hedging strategy and the instrument meets expectations, then:
- Potential gain% on the portfolio: + 3%
Remember that this is my market vision and should not be interpreted in any way as an investment advice!