Leveraging U.S. Treasury Bonds Using the Futures Market

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In my prior article, I showed why leveraged U.S. Treasury bonds make sense as an ordinary investment – one that rivals the returns of equities but with smaller drawdowns. This article converts theory into practice using the universally accessible futures market, without borrowing money.

My goal is not to set the reader out to do it alone, but rather to demystify the mechanics and show it is possible.

What are futures?

Futures contracts seem more complicated than they really are. Their name and definition imply that traders have an opinion about an asset’s price at a particular date in the future. Not so. Most futures are simply a way to buy and sell assets that are otherwise cumbersome. That’s it. They react to the same information the underlying asset reacts to, at the same time and in the same proportion.

Futures first arose to facilitate the trading of commodities. The innovation was to move the settlement date of a trade (day when money and product are exchanged) out beyond the usual one or two days, to 90 or more days (the future), and then to use a single settlement date for a given window of time (the delivery date in futures parlance). Moving the settlement day far away allowed traders to buy and sell assets that were big and heavy (think oil, cattle, gold) without immediately having to worry about delivering them. Using a single settlement date created a tradeable market in a single contract. Traders could get into and out of the contract before it settled – never having to pay for, or take delivery of the commodity – instead just participating in changes of its price.