Buying US Treasury cash bonds using appropriate leverage


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“Cash bonds” means you are buying the underlying securities. Some broker-dealers, such an Interactive Brokers, IB have institutional grade platforms for transacting in the Treasury cash bond market. IB provide leverage in low costing.

Using leverage is risky because it has to be managed properly.

The general method is to buy Treasuries on leverage – collateral requirements are only 1-10 percent depending on the bond’s maturity – then swap out the negative USD balance (incurred from buying the bonds on leverage) for a foreign cheap currency (e.g., JPY, CHF, EUR) by buying USD against one of those currencies.

The net effect is that you will own a pile of Treasury bonds giving you some type of yield, and short a cheap funding currency. In other words, you’re shorting the cheap currency to be long the higher yielding US Treasury bonds.

The cost of USD leverage is typically the effective fed funds rate plus 150bps for lower sums of borrowing (under $100k). That means you’d be borrowing at 330-340bps based on where the rate is at the time of writing.

The rationale is to borrow in a cheaper currency.

The longer the duration of the bonds, the greater their volatility and the more you are making a concentrated bet on interest rates.

On Interactive Brokers, for every $100k borrowed (in approximate USD equivalence) in one of the cheap zero-interest rate currencies they charge 1.5 percent. This is expensive, but among the best available among online brokers. For $100k-$1mm borrowed, the cost is 1 percent. For every dollar equivalent past $1mm, it’s 0.5 percent, which starts to approach the rates you might get if you were primed with an investment bank.

Interactive Brokers - Interest Charged on Margin Loans

BM = Benchmark Rate​

0 ≤ 100,000​
1.59% (BM + 1.5%)​
2.59% (BM + 2.5%)​
100,000 ≤ 1,000,000​
1.09% (BM + 1%)​
2.59% (BM + 2.5%)​
1,000,000 ≤ 3,000,000​
0.75% (BM + 0.5%)1​
2.59% (BM + 2.5%)​
3,000,000 ≤ 200,000,000​
0.75% (BM + 0.3%)1​
2.59% (BM + 2.5%)​
> 200,000,000​
0.75% (BM + 0.3%) 1,2​
2.59% (BM + 2.5%)​