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US Treasuries that have less than 6 months till maturity allow for 100x leverage, as the regulatory requirement is to put 1% of the market value down for each bond.

So a $1,000,000 account could hold $100,000,000 of 3 month bonds and earn 1.06% a year. No need to mention that the risk of the bond declining merely 1% in value would destroy the account.

Could that same purchase be used as collateral for 30 year bonds, which yield 2.90%?

Somehow I think I'm getting the process backwards, but could you borrow 100 times an account's worth at 1.06% and invest at 2.90%? where you would continually roll over the 3 month maturity bonds, and ultimately pocket the difference for 1.84% annually on $100,000,000 USD. Making your return on $1,000,000 to be 184%, for an extra $1,840,000 per year.

If not, I will have a followup question

CQM
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1 Answers1

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If you had $1,000,000 in cash in a brokerage account you could buy $100,000,000 of Bonds with that money. However, as the value of the bonds fluctuated you would need to add more money to ensure you were within the 1% margin requirement. If not, then your broker would be entitled to sell the bonds to meet the margin requirement.

Could that same purchase be used as collateral for 30 year bonds, which yield 2.90%?

No. After you purchased those bonds, you would not have any more money to purchase 30 year bonds unless you sold some of the 1 year bonds, or found some other way to cover the margin requirement. Your broker will not let you take the securities out of your account to deposit as collateral in another account, without paying back the margin loan first. There is a distinction between Net Liquidation Value (the value of your account) and Securities Gross Position Value (the value of the bonds).

The margin requirement for bonds with more than 20 years to maturity is 9%, so with $1,000,000 in cash you would only be able to buy about $11.1 million worth of 30 year bonds.

xirt
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