Best Trade of 2009
Almost exactly a year ago, I mentioned a paired-trade between the long-term Bond ETF (TLT) and short-term corporate/sovereign bond ETF (AWF). I went long AWF and shorted an equal dollar amount of TLT. Last week, I closed the position after holding it for just over a year.
When I entered the trade, AWF was trading for $8.29 and had a yield of 13.4%, while my short position in TLT was trading at $112.10 and had a yield of 3.5%. When I close out my position a year later, AWF had a price of $13.10 and a yield of 8.6%, while TLT was going for $91.65 and yielding 3.9%.
I made about 63% on the long AWF position and 18% on the short TLT position. Coupled with the 9.9% net dividend yield, that trade made me ~91%. Not a bad return for a year and 4 days. Bond yields don’t usually move 500 basis points in a year. No point being greedy. Time to bank some profit!
A drop in the stock market will cause the price of bonds to move up, since they typically are inversely correlated. Similarly a sharp rise in in yields would cause bonds price to drop. I expect a move in TLT to about roughly $96 at which point I might renter the position depending on the larger macro-economic picture.
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