2009 tax futures yielding 1.5%

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The &#8220-&gt-34&#8243- contracts are being offered at 96. If you discount the possibility of the marginal tax rate for that year being below 34%, this is an annual yield of about 1.5%, after transaction fees. The 2010 &#8220-&gt-34&#8243-s are paying around 1.35% and the 2011s, 1.2%. Buying any of those allows you to sell higher contracts on the ladder at reduced margin, as described before.

A possible trade that stands out on the board is to sell the 2010 &#8220-&gt-36&#8243-s in the high 70s and buy the 2010 &#8220-&gt-38&#8243-s for 50. I don&#8217-t see how a spread of 30 is warranted there, as any legislation that accelerates the Bush tax cuts sunset will likely put the highest marginal rate at 39.6%, higher than 38% at least. That is, I think the market&#8217-s implied probability of the rate ending-up in the 36-38 bin is too high. This trade would make roughly a 39% return on frozen margin, which could be improved to 50% by additionally buying the &#8220-&gt-34&#8243-s at 95. (unannualized)

2 thoughts on “2009 tax futures yielding 1.5%

  1. Ashish said:

    yea .. but have you seen the depth of the order book on these things .. maybe 10-15 contracts at that price and then there is a huge gap to the next one. Intrade needs to eliminate thinly traded contracts and push more liquidity into contracts that actually can be traded.

  2. Jason Ruspini said:

    Yes I have seen the order book on these things.. pathetic, of course, though 3 weeks old. I doubt eliminating thinly-traded contracts would help a lot. I think the issue is more about the difficulty of funding accounts, with possible market-makers being constrained by the regulatory situation.

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