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The Q.ai Team

About Q.ai's Bond Spread Kit

About Q.ai's Bond Spread Kit

Overall, it’s been a tough time for bond investors, whose portfolios have largely been thrown off by inflation data and the Federal Reserve’s attempts to combat it with rising interest rates.

Treasury yields, which tick up when bond prices tick down, continue to climb. The yield on the 10-year Treasury hit three percent earlier in May for the first time since late 2018. 

While we don’t know where the overall rate environment—or the value or bonds or yields—will go in the months to come, we do know that credit spreads, between corporate bonds and treasuries, seem to be too high. 

And we also know that you can benefit from the future narrowing of corporate bonds and treasury yields without taking on additional risks, like rises in interest rates. And that’s thanks to Q.ai’s latest low-risk drop: the Bond Spread Kit.

About the Bond Spread Kit

At the moment, investors are still concerned about default risk. This risk refers to the health of large US companies and their capabilities to repay their debts and see success in today’s pandemic-pummeled market. The current spread between corporate bonds and treasury yields is a reflection of their fears, but we believe it to be overblown.

That’s why we created the Bond Spread Kit, which, in a way, is an expression of a positive outlook on the credit health of established US corporations. But instead of just buying more corporate bonds, this low-risk Kit takes a short position, as well.

The paired trade aims to isolate the risk premium between bonds and treasuries without taking on additional risk like interest rate risk or duration risk commonly associated with corporate bonds.

Boiled down: The Kit goes long bonds and shorts treasuries to isolate and capture the narrowing of the spread.

Invest in high-quality corporate bonds and short treasuries

Investing long and shorting gets complicated, especially with paired trades. And that’s why we use inverse ETFs that offer the same benefits of holding short positions without the complex mechanics. 

The Bond Spread Kit takes a long-short approach to investing your funds by purchasing an ETF of high-quality corporate bonds and shorting (through an inverse ETF) treasuries.

The Kit purchases an even amount of corporate bonds, with the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and a “short” of treasuries with similar duration by investing in the inverse ETF, ProShares Short 7-10 Year Treasury (TBX).

It’s worth noting that, while there are thousands of different companies’ bonds involved here, you may see names like JP Morgan Chase, Goldman Sachs, AT&T, Citi, Morgan Stanley, Verizon, Comcast, Apple, and more.

Because you hold one asset long and a related asset short, you offset many risk factors and benefit from the relative difference in yields for high-quality corporate bonds and treasuries becoming smaller.

Plus, this Kit will rebalance weekly to ensure that the strategy is isolating the very factor we want to capture: the spread between corporate bonds and treasuries.

Reduce interest rate and duration risk with Bond Spread

The Bond Spread Kit works to help reduce interest rate and duration risk, as well as some other risks commonly associated with bonds. It’s able to do this thanks to the long-short approach.

Given the similar duration of the two baskets, a change in risk like interest rates, for example, should affect both proportionally.

In other words, whatever happens to the economy and ensuing interest rates—and however that all affects bonds and yields—it doesn’t totally matter for this strategy. Both securities could theoretically decline in value, but so long as they do indeed tighten, you can see positive, absolute returns.

Bottom line

Through this Kit, you can benefit from Q.ai’s AI-backed expectations that corporate yields will indeed come down (relative to treasuries)—without taking on other risks associated with bond investing.

Additionally, because it’s a specialized paired trade, we’re offering it as a smaller position that anyone can add to their portfolio. The low investment minimum of the Kit is only $25, making it a more affordable way to diversify your portfolio.

While this kind of strategy would be productized by an investment bank for high-net-worth clients, Q.ai makes it accessible to everyone.

Add the Bond Spread Kit to your investment portfolio in Q.ai.

Disclosures
Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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