Hedging Against Rising Oats Prices using Oats Futures

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Using ETFs To Hedge Against Rising Rates

September 29, 2020

The September Federal Reserve meeting passed without much fanfare, quieting markets that had been getting jittery about a rate hike. The central bank―eyeing the uncertainty of a presidential election in November―chose to delay its much-anticipated interest rate increase, but not for long.

After the no-change decision, Federal Reserve Board Chair Janet Yellen told the press that she expects a rate hike sometime this year. That means that an increase may come either at the November or December meeting, with most economists targeting the latter as the likeliest option for a move.

If so, it will be deja vu, for it was last December when the Fed hiked rates for the first time in nearly a decade after months of anticipation. Another hike this December would push the federal funds rate up by 25 basis points to a range of 0.50-0.75% from 0.25-0.50%.

Rates Down From Start Of Year

Market-set rates are up from their lows ahead of the potential rate increase, though they’re down significantly from where they were at the start of the year.

The two-year Treasury bond yield, for example, is at 0.75%, up from a low of 0.50% in June, but down from 1.05% on Dec. 31. At the same time, the 10-year Treasury bond yield is at 1.56%, up from a record-low 1.32% in July, but down from 2.27% on Dec. 31.

It’s impossible to say whether the next Fed hike will be the catalyst that finally spurs a big rally in interest rates (and sell-off in bonds). But for investors who want to protect themselves, there are many tools available in the ETF world to minimize the impact of higher rates, or even capitalize on them.

Lower Duration Bonds

The classic advice given to investors in a rising rate environment is to reduce the duration of your bond portfolio. Duration is a measure of interest rate risk and is based on a bond’s maturity and coupon payments.

A higher-duration portfolio has more interest rate risk than a lower-duration portfolio. By reducing duration―for example, by buying shorter-term bonds―a portfolio will have less interest rate risk. The flip side is that the portfolio will probably have a smaller yield as well.

There are plenty of low-duration ETFs on the market that can help reduce the average duration of an investor’s portfolio, including the iShares 1-3 Year Treasury Bond ETF (SHY), the PIMCO Enhanced Short Maturity Active ETF (MINT) and many more.

Inverse Bond ETFs

Another method with which to hedge against rising rates is inverse ETFs. These funds short Treasury bonds, meaning they rise in price when interest rates increase (bond prices and rates generally move inversely).

The ProShares Short 20+ Year Treasury ETF (TBF) provides daily inverse exposure to Treasurys with maturities greater than 20 years.

Meanwhile, the Sit Rising Rate ETF (RISE) shorts futures contracts on two-, five- and 10-year Treasurys with a specific goal of maintaining a duration of negative 10. That means if interest rate rise by 1%, the ETF should rise by 10% (and vice versa).

TBF, RISE and similar ETFs can be used to hedge other bond funds in a portfolio or as stand-alone products to speculate on the direction of interest rates.

Keep in mind, however, that any product that shorts positive-yielding bonds will have to pay a cost to maintain that position over time. This can result in losses even if interest rates remain flat.

YTD Returns For TBF, RISE, TLT, IEF

Long/Short Bond Funds

Another group of ETFs attempts to reduce duration by simultaneously holding long and short positions in bonds. The WisdomTree Barclays US Aggregate Bond Negative Duration Fund (AGND) holds the bonds in the Barclays Aggregate Bond Index and a short position in Treasurys at the same time. The result is a portfolio of bonds with a duration of negative 5.

Once again, AGND could be used as a stand-alone product to speculate on interest rates or combined with, say, another position in the iShares Core U.S. Aggregate Bond ETF (AGG) (which incidentally has a duration of positive 5) to reduce an investor’s interest rate risk.

ETFs that use a similar strategy as AGND’s include the VanEck Vectors Treasury-Hedged High Yield Bond ETF (THHY) and the ProShares High Yield-Interest Rate Hedged ETF (HYHG), which short Treasurys to hedge a portfolio of high-yield bonds. Both target a duration of zero.

YTD Returns For AGND, THHY, HYHG, AGG, HYG

Floaters

For investors who want to do away completely with interest rate risk, a straightforward solution floating-rate ETFs. The iShares Floating Rate Bond ETF (FLOT) holds a basket of bonds with maturities of five years or less. As floating rate notes, the interest rates on these securities resets periodically based on market rates; so if rates increase, the payout increases too (the downside is that rates on floaters will tend to be lower to account for the smaller risk).

Floaters are attractive compared to fixed-rate bonds when rates are expected to increase, but not as attractive when rates are expected to decline.

The PowerShares Senior Loan Portfolio (BKLN) is another type of floating-rate ETF. It tracks an index of the 100 largest bank loans with floating rate coupons. The fund has little interest rate risk, but relatively high credit risk due to its below-investment-grade portfolio.

YTD Returns For FLOT, BKLN, SLQD, HYG

Oats May ’20 (ZOK20)

grains Futures News

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Grains steady overnight ahead of USDA data and day off for Good Friday

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Traders Remain Cautious As Markets Rebound

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The All Futures page lists all open contracts for the commodity you’ve selected. Intraday futures prices are delayed 10 minutes, per exchange rules, and are listed in CST. Overnight (Globex) prices are shown on the page through to 7pm CST, after which time it will list only trading activity for the next day. Once the markets have closed, the Last Price will show an ‘s’ after the price, indicating the price has settled for the day. The page will always show prices from the latest session of the market.

End-of-Day prices are updated at 8pm CST each evening, and includes the previous session volume and open interest information.

The Cash Contract is listed as the first contract at the top of the page.

Data Updates

For pages showing Intraday views, we use the current session’s data, with new price data appear on the page as indicated by a “flash”. Stocks: 15 minute delay (Cboe BZX data for U.S. equities is real-time), ET. Volume reflects consolidated markets. Futures and Forex: 10 or 15 minute delay, CT.

The list of symbols included on the page is updated every 10 minutes throughout the trading day. However, new stocks are not automatically added to or re-ranked on the page until the site performs its 10-minute update.

Page Sort

Pages are initially sorted in a specific order (depending on the data presented). You can re-sort the page by clicking on any of the column headings in the table.

Views

Most data tables can be analyzed using “Views.” A View simply presents the symbols on the page with a different set of columns. Site members can also display the page using Custom Views. (Simply create a free account, log in, then create and save Custom Views to be used on any data table.)

Each View has a “Links” column on the far right to access a symbol’s Quote Overview, Chart, Options Quotes (when available), Barchart Opinion, and Technical Analysis page. Standard Views found throughout the site include:

    Main View: Symbol, Name, Last Price, Change, Percent Change, High, Low, Volume, and Time of Last Trade.

Technical View: Symbol, Name, Last Price, Today’s Opinion, 20-Day Relative Strength, 20-Day Historic Volatility, 20-Day Average Volume, 52-Week High and 52-Week Low.

Performance View: Symbol, Name, Last Price, Weighted Alpha, YTD Percent Change, 1-Month, 3-Month and 1-Year Percent Change.

  • Fundamental View: Available only on equity pages, shows Symbol, Name, Weighted Alpha, Market Cap, P/E Ratio. Earnings Per Share, Beta, Return on Equity, and Price/Sales
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    Horizontal Scroll on Wide Tables

    Especially when using a custom view, you may find that the number of columns chosen exceeds the available space to show all the data. In this case, the table must be horizontally scrolled (left to right) to view all of the information. To do this, you can either scroll to the bottom of the table and use the table’s scrollbar, or you can scroll the table using your browser’s built-in scroll:

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    • TERM Spring ’12
    • PROFESSOR ibenayyousuf
    • TAGS Finance,Financial Markets,Hedging, Ian Buckley
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    Chapter 3 – Hedging Strategies Using Futures

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    Oat Futures

    Wild oats trace their origins to the Fertile Crescent in the Near East, but it was not until much later during the Bronze Age when oats become a cultivated crop in Europe. A relatively hardy crop, oats are known to be grown successfully as far north as Iceland, although they do much better in temperate zones. For example, the top producers of oats are of temperate climates, with the highest yields coming from Poland, Germany, Russia, and Canada. The U.S. also grows large quantities of oats and therefore continuously ranks in the top ten oats producers compiled by the Food and Agriculture Organization.

    Oat Futures Contract Specifications
    Contract Size 5,000 bushels (

    86 metric tons)

    Price Quotation Cents per bushel
    Grade And Quality No. 2 Heavy and No. 1 at par. No. 1 Extra Heavy at 7 cents per bushel over contract price. No. 2 Extra Heavy at 4 cents per bushel over contract price, and No. 1 Heavy at 3 cents per bushel over contract price. No. 2(36 pound total minimum test weight) at 3 cents per bushel under contract price and No. 2 (34 pound total minimum test weight) at 6 cents per bushel under contract price.
    Trading Hours Sunday – Friday 7:00 p.m. – 7:45 a.m. CT and
    Monday – Friday 8:30 a.m. – 1:20 p.m. CT
    Minimum Price Fluctuation 1/4 of one cent per bushel ($12.50 per contract)
    Product Code CME Globex: ZO
    CME ClearPort: O
    Clearing: O
    Listed Contracts March (H), May (K), July (N), September (U) & December (Z)
    Settlement Method Deliverable
    Last Trade Date The business day prior to the 15th calendar day of the contract month.
    Last Delivery Date Second business day following the last trading day of the delivery month.
    Settlement Procedures Oat Futures Settlement Procedures
    Exchange Rules These contracts are listed with, and subject to, the rules and regulations of CBOT.
    Source: CME Group

    Oat Facts

    Oats grow in more temperate regions due to its greater tolerance for rain compared to other grains. Oats are an annual plant; the top producing states in the US start planting between April and May for an early autumn harvest.

    Oats are considered “healthful”. With the discovery of healthy cholesterol-lowering properties and its reputation of being nutritious, oats has garnered wider appreciation as human food. Oats are commonly “rolled” into oatmeal or flour. It can also be found in several drinks, such as beer and malt. However, oats are widely used as fertilizer and feeder, specifically for horses and cattle.

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