EDV - long term zero coupon bonds - opinion?

Investing / Others
1

Hi there,

As you’ll soon notice from what I write…I’m kind of a newbie, did some study course on the side, am still reading and as usual, the more one reads the less you know.
I know we’re in an inverted yield curve environment.
I know the interest rates are currently very high with probably not so many hikes left for the FED to take, albeit no one has a crystal ball to tell the future.

I saw that EDV currently trades at what is possibly its lowest value historically.
Duration is around 24.
Was thinking that even with 1-2 more rate hikes, the long term chances are still that the interest rates go down 1-2 points in 1-2 years and then would there be any arguments against this ETF for a worthy risk/gain premium?

(my primitive thinking is that even if there’s still risk of losing let’s say 10% with more hikes, on the long run 2-3 years, it would be a gain of ~ 40% if the interest rates go down 2 points)

Any opinion?
As I said I am not savvy in this so I’m looking to hear more than my inner voice :slight_smile:

Thank you!

1 Like
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First question: why do you care about what happens with USD? Are you moving to US next few years?

I know that most financial “news” are about US, but still, you should figure out where you stand.

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I was thinking:

  • Swiss market is small
  • European one incurs more cost when it comes to L1/L2 withholding and analysing all the agreements between states
  • US one in this case with the bonds is easier to deal with (of course it carries the risk of exchange rate fluctuations)

The EDV move I wanted to make on a limited time frame of 2 years and then move the amount in slow steps / DCA fashion toward the portfolio I already started building with other instruments.

That’s where I was coming from.

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It would be a high-risk speculative bet, but I can see the reasoning for it. The only additional thing you need to account for is the currency risk since you are gambling on falling rates, which normally results in falling USD too.

I guess you could counteract this by shorting Treasuries elsewhere on the curve e.g. Short 10 year and long 20/30 year. So maybe you could do Short IGOV, long TLT.

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@PhilMongoose that’s one valuable piece I did not know of before-hand. Thank you.
Found also the explanation here:

“When an interest rate of a currency increases, it also increases in demand because it offers a higher return than other currencies. On the other hand, when a currency pair’s interest rate falls, most traders move to sell it against a stronger currency to avoid big losses.”

The change does not seem to be huge though, I mean not cancelling the “duration” percentage out but rather causing a more minor hit. I hope I interpret the historical graphs I found right.

@oslasho may I ask what you referred to regarding tax inefficiency?
Most of my friends bought US ETFs to eliminate L1 withholding (except if VT and then still 60% is eliminated) and in USD (also the biggest AUM and more liquidity).
Then they do declare each year the holdings and dividends.
What would be more efficient if buying ETFs in CHF currency? (or better said what would be different)

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It looks like many people are looking to short IGOV as it has large borrow fees (>7%!) so it doesn’t look like you can short this profitably.

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I think you’re right. I guess it obviously depends on what actually happens, but maybe a 20% hit would be expected?