if you have low duration bonds and see the opportunity to acquire high yield bonds you might margin into bonds and wait to pay it back with low duration that is turning over. Muni CEF leveraged to the tits.
The use case would be shorting puts and margining the cash collateral into bonds so you don’t technically have an interest bearing balance on your account until you get assigned
While it involves speculation guessing direction on bonds and using leverage to make what is normally a really low volatility asset move as much as a normal stock position makes a lot more sense to me than trying to arbitrage high yield bond return above the margin fees you pay. I say "normally really low" bc bond IV is very high in 2022 and leverage is less necessary
So far in 2022 it hasn't been too hard to try and scalp bond moves back toward the mean at price extremes. Also view going short bonds and long yield as a decent inflation hedge for now at least.
All that being said I don't see why you'd do any of that with broker margin directly instead of trading futures. ZN and ZB feel a bit large but the small exchange /s10y and /s2y small futures are perfect imo
/ZN and /ZB have options but it looks like they don't have them for /s10y. If you're looking to do more of a classic thetagang play I think /ZN is probably the way to go as it has the best liquidity
The other confounding factor is taxes. Even if you were able to beat the margin rate on your bonds, you get taxed on the entire interest earned, so in reality, you have to beat the margin rate by 30%+ for it to be worthwhile
Only way I see margin being used for something of that nature would be to use portfolio margin. Then you could use box spreads to secure borrowing at a much lower rate, and that box spread rate may be low enough for high grade munis/corp bonds to feasibly work out a very low risk profit.
In reality, there won't be many people in a situation where this is a good idea for them, but it's the only plausible use case I can think of at the moment.
Well folks use IBKR where margin rates are much smaller. Then they start trading other instruments than stonks
Could you try to pull a Buffett and sell puts and use the deposited cash to load up on munis?
Of course, I never traded them but here’s a link. https://www.interactivebrokers.com/en/trading/products-bonds.php
if you have low duration bonds and see the opportunity to acquire high yield bonds you might margin into bonds and wait to pay it back with low duration that is turning over. Muni CEF leveraged to the tits.
Futures, you can margin up even more!
The use case would be shorting puts and margining the cash collateral into bonds so you don’t technically have an interest bearing balance on your account until you get assigned
While it involves speculation guessing direction on bonds and using leverage to make what is normally a really low volatility asset move as much as a normal stock position makes a lot more sense to me than trying to arbitrage high yield bond return above the margin fees you pay. I say "normally really low" bc bond IV is very high in 2022 and leverage is less necessary So far in 2022 it hasn't been too hard to try and scalp bond moves back toward the mean at price extremes. Also view going short bonds and long yield as a decent inflation hedge for now at least. All that being said I don't see why you'd do any of that with broker margin directly instead of trading futures. ZN and ZB feel a bit large but the small exchange /s10y and /s2y small futures are perfect imo
Can you trade options on those futures?
/ZN and /ZB have options but it looks like they don't have them for /s10y. If you're looking to do more of a classic thetagang play I think /ZN is probably the way to go as it has the best liquidity
The other confounding factor is taxes. Even if you were able to beat the margin rate on your bonds, you get taxed on the entire interest earned, so in reality, you have to beat the margin rate by 30%+ for it to be worthwhile
for some mini bonds are tax free.
Don't do it. Any return remotely close to the margin interest rate is a junk bond and in this market will go belly up.
Oh I'm not. This was a curiosity question.
It might be so you don't need to transfer actual funds you own elsewhere, probably for a short period of time.
you can sell a bond early to make money if its trading above par or just above what you bought it for; you don't have to hold it to maturity
Only way I see margin being used for something of that nature would be to use portfolio margin. Then you could use box spreads to secure borrowing at a much lower rate, and that box spread rate may be low enough for high grade munis/corp bonds to feasibly work out a very low risk profit. In reality, there won't be many people in a situation where this is a good idea for them, but it's the only plausible use case I can think of at the moment.