Thursday, December 15, 2011

TLT: Tender Loving Tranquility

I'm getting nervous again about the euro-zone, not to mention the possibility of a trade war over cars with China, a resumption of hostilities in Iraq should Iran turn feisty, last-minute Christmas shopping and the likelihood of rain in my home town of Portland, Oregon, where it always rains in December.

Time for a dose of Tender Loving Tranquility -- TLT -- the exchange-traded fund that tracks U.S. Treasury bonds having a term of 20 years or greater.

TLT pays a monthly dividend, currently at 28.98¢, which works out to about to about 3.3% annualized at the current price.

U.S. bonds are traditionally treated as a safe haven in times of danger, and certainly a collapse of the European banking system would count as such, along with major wars -- both trade and hot. Rain in Portland and Christmas shopping? Probably not so much.

The virtue of TLT is not only that it pays a monthly dividend and has a high-degree of safety. It is also highly liquid, with an average daily volume of more than 8 million shares. And it has a very liquid suite of options that can be used to hedge movements in the price.

In other words, if I'm holding shares and the price starts to decline, I can buy puts and profit from the fall while still holding the shares for the dividend.

The price has been meandering sideways since hitting a peak of $125.03 on Oct. 4, as the Eurozone governments have worked hard to at least give the illusion that they're doing something about the euro's near-fatal design flaws.

Longer-term, the weekly chart shows the price churning near the top of a rise that began Feb. 7 at $89.66.

Also, TLT is a good cash parking place for people like me who do covered calls. I'm fairly bearish the market these days, and won't be opening new covered call positions for January expiration (although I do have some short calls that will expire expire unexercised this weekend, and I will sell new calls on the underlying shares). TLT is where I'll put that cash.

Disclosure: I hold a long shares position in TLT.

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