Introduction
The Model Fixed-Income Portfolio had a good second quarter, in both absolute and relative terms. The account registered a positive total return of 3.20% for the quarter, which made a significant contribution to te 10.18% cumulative return from inception on 12/31/02. A good deal of trading activity has been necessary to accomplish these results, and I don't anticipate that this is going to change much in the months ahead.
_____
Second-Quarter 2004 Recap
* Following are respective total returns for the second quarter of 2004 and other periods ended 6/30/04 for the model portfolio, the 90-day T-Bill and the 30-year T-Bond:
Model
Bond 90-Day 30-Year
Period Port. T-Bill T-Bond#
-------------------------------------------------
Month Ended 6/30/04 0.09% 0.07% 1.05%
Qtr. Ended 6/30/04 3.20% 0.23% (6.08%)
Qtr. Ended 3/31/04 1.05% 0.23% 5.72%
YTD Through 6/30/04 4.28% 0.46% (0.71%)
Incep. Thru 6/30/04* 10.18% 1.52% (0.46%)
-------------------------------------------------
*Inception=12/31/02. #Treasury 5.375s of 2/15/31.
-------------------------------------------------
* Performance calculations incorporate the assumption that interest income is reinvested. Thus, all the above results include reinvestment returns.
* Per its guidelines, the model bond account's investment universe is limited to Treasury bills, the 10-year Treasury note, or the 30-year Treasury bond. The account may establish short positions in notes and bonds, limited to 40% of account value.
* The model portfolio significantly outperformed the long Treasury bond during the June quarter, as it has done on a cumulative basis since its inception on 12/31/02.
* From account inception (12/31/02) through 6/30/04, the Treasury 5.375s of 2/15/31 registered a cumulative total return of minus 0.46%. The cumulative 90-day T-Bill return during this period was a meager 1.52%, while the model bond portfolio returned 10.18%. I point out the obvious, therefore, which is that a significant amount of trading has been required in the model bond account to produce the large performance spreads.
* As the above numbers indicate, the long T-Bond had a very bad experience during the second quarter, largely the result of the negative impact on its price of a rise in yield from 4.77% to 5.30% between 3/31 and 6/30. This yield decline resulted in a principal price erosion of $80.32, or almost 7.4% per bond during the period.
Second-Quarter Non-T-Bill Transactions Closed
* During 2004's second quarter, the portfolio had long and short positions in the Treasury 5.375s of 2031. Positions closed out during the quarter resulted in net realized gains of $29,405. Of this total, $24,505 came from short positions; the remaining $4,900 came from long-side transactions.
* Between contract dates 4/13 and 4/20, the account covered a Treasury 5.375s of 2031 short position totaling 395,000 (par value) that resulted in total gains of $20,908. This position had been established between contract dates 2/11/04 and 3/1/04.
* On contract date 6/7, the account covered a Treasury 5.375s of 2031 short position totaling 150,000 (par value) that resulted in a gain of $3,597. This position had been established on contract date 5/27/04.
* On contract dates 5/21 and 5/25, the account sold a Treasury 5.375% long position totaling 500,000 (par value) that resulted in a gain of $4,900. This position had been established on contract date 5/11/04.
Other Second-Quarter Non-T-Bill Transactions
* Between contract dates 6/15 and 6/30, the account established a Treasury 5.375s of 2031 short position totaling 440,000 (par value). This position remained open as of 6/30, representing an unrealized loss of $2,384 as of quarter-end. Following are the details of these short sales.
-------------------------------------------------
Model F-I Portfolio L-T Treasury Transactions
(Treasury 5.375s of 2/15/31)
-------------------------------------------------
Short Sales
-------------------------------------------------
Cont. Par Unit YTM Princ. Cum.
Date Value Price (%) Proceeds Proceeds
-------------------------------------------------
2004
06/15 200000 999.34 5.38 $199868 $199868
06/24 100000 1007.86 5.32 $100786 $300654
06/30 140000 1010.70 5.30 $141498 $442152
-------------------------------------------------
440000 1004.89 $442152
====== ======= ======
Weighted Yield to Maturity = 5.349%
Average Current Yield = 5.341%
-------------------------------------------------
Expectations
The "full" (roughly 40%) short position in the Treasury 5.375s certainly is an accurate reflection of my view at the moment on the prospect for long-term interest rates over the next several weeks. I have not set a specific exit point, but at present, I would think that something in the 5.45% to 5.50% range is doable.
* Table 1 below contains a summary of the account's quarter-end holdings, as well as a reconciliation of portfolio performance and investment activity.
* Table 2 below contains the account's transactions journal covering the June quarter.
_____
Table 1.
------------------------------------------------------
GILLESPIE MODEL FIXED-INCOME PORTFOLIO
(As of the Close of Business 06/30/04 and
Calculated on a Contract-Date Basis)
------------------------------------------------------
% of
Quant./ Unit Market Port. Gain/
Security Price Value Cost @ Mkt. (Loss)
------------------------------------------------------
1560000 US Treas.
Bills, 09/30/04 996.74 1554914 1554674 100.0 0*
Cash Balance 403 403 0.0 0
------- ------- ----- =
Total 1555317 1555077 100.0 0
======= ======= ===== =
------------------------------------------------------
SOLD SHORT AND NOT COVERED AS OF THE CLOSE ON 06/30/04
------------------------------------------------------
Short
Quant./ Unit Market Sale Gain/
Security Price Value Proc. (Loss)
------------------------------------------------------
440000 US Treas.
Bonds, 5.375%,
Due 2/15/31 1010.31 444536 442152 (2384)
Accrued Interest 8934
------ ----
Total 453470 (2384)
====== ====
------------------------------------------------------
------------------------------------
CONSOLIDATION and PERFORMANCE
------------------------------------
Long Position 1555317
Less Short Position
At Market Value 453470
-------
Net of Above 1101847
Less Inception Value 1000000
-------
Profit/(Loss) 101847
=======
Total Returns
-------------
Model Portfolio
---------------
Month Ended 06/30/04 0.09%
Qtr. Ended 06/30/04 3.20%
Qtr. Ended 03/31/04 1.05%
YTD Through 06/30/04 4.28%
From 12/31/02 Incep. 10.18%
------------------------------------
90-Day Treasury Bill
--------------------
Month Ended 06/30/04 0.07%
Qtr. Ended 06/30/04 0.23%
Qtr. Ended 03/31/04 0.23%
YTD Through 06/30/04 0.46%
From 12/31/02 1.52%
------------------------------------
Long Treasury Bond#
------------------
Month Ended 06/30/04 1.05%
Qtr. Ended 06/30/04 (6.08%)
Qtr. Ended 03/31/04 5.72%
YTD Through 06/30/04 (0.71%)
From 12/31/02 (0.46%)
------------------------------------
RECONCILIATION
(Amounts From Inception@)
------------------------------------
Realized Gains/(Losses) 88573
Unrealized Gains/(Losses) ( 2384)
Interest Paid ( 71125)
Interest Received 95477
Accrued Interest Payable ( 8934)
Accrued Interest Receivable 240
------
Net Total of Above 101847
======
------------------------------------
*Difference between T-Bill
market value and cost equals
income accrued on the holding.
#Treasury 5.375s of 2/15/31.
------------------------------------
Table 2.
---------------------------------------------------
GILLESPIE MODEL FIXED-INCOME
PORTFOLIO -- TRANSACTIONS JOURNAL
(For the Period 03/31/04 Through 06/30/04)
---------------------------------------------------
Date Description Debit Credit Balance
---------------------------------------------------
2004
03/31 Closing Cash Balance 1139
04/01 Treasury Bill Maturity
Principal 1497501 1498640
Interest 2499 1501139
03/29 For Settlement 04/01:
Bought 1500000 UST Bills,
07/01/04 @ 0.945% D,
Unit Price = 997.61 1496415 4724
04/13 For Settlement 04/14:
Bought (to cover
short) 100000
US Treasury Bonds
5.375%, 02/15/31 @
1035.63 (YTM=5.13%) 103563 -98839
Accrued Interest 881 -99720
04/13 For Settlement 04/14:
Sold 100000 UST Bills,
07/01/04 @ 0.91% D,
Unit Price = 998.03 99803 83
04/14 For Settlement 04/15:
Bought (to cover
short) 100000
US Treasury Bonds
5.375%, 02/15/31 @
1019.40 (YTM=5.24%) 101940 -101857
Accrued Interest 896 -102753
04/14 For Settlement 04/15:
Sold 105000 UST Bills,
07/01/04 @ 0.92% D,
Unit Price = 998.03 104793 2040
04/19 For Settlement 04/20:
Bought (to cover
short) 95000
US Treasury Bonds
5.375%, 02/15/31 @
1025.20 (YTM=5.20%) 97394 -95354
Accrued Interest 908 -96262
04/19 For Settlement 04/20:
Sold 100000 UST Bills,
07/01/04 @ 0.91% D,
Unit Price = 998.18 99818 3556
04/20 For Settlement 04/21:
Bought (to cover
short) 100000
US Treasury Bonds
5.375%, 02/15/31 @
1020.85 (YTM=5.23%) 102085 -98529
Accrued Interest 970 -99499
04/20 For Settlement 04/21:
Sold 100000 UST Bills,
07/01/04 @ 0.92% D,
Unit Price = 998.19 99819 320
05/11 For Settlement 05/12:
Bought 500000
US Treasury Bonds
5.375%, 02/15/31 @
985.30 (YTM=5.48%) 492650 -492330
Accrued Interest 6495 -498825
05/11 For Settlement 05/12:
Sold 500000 UST Bills,
07/01/04 @ 0.90% D,
Unit Price = 998.75 499375 550
05/21 For Settlement 05/24:
Sold 250000 US Treasury
Bonds, 5.375%, 02/15/31
@ 995.10 (YTM=5.41%) 248775 249325
Accrued Interest 3695 253020
05/21 For Settlement 05/24:
Bought 250000 UST Bills,
07/01/04 @ 0.77% D,
Unit Price = 999.19 249798 3222
05/25 For Settlement 05/26:
Sold 250000 US Treasury
Bonds, 5.375%, 02/15/31
@ 995.10 (YTM=5.41%) 248775 251997
Accrued Interest 3770 255767
05/25 For Settlement 05/26:
Bought 255000 UST Bills,
07/01/04 @ 0.85% D,
Unit Price = 999.15 254783 984
05/27 For Settlement 05/28:
Sold Short 150000
US Treasury Bonds,
5.375%, 02/15/31
@ 1009.28 (YTM=5.31%) 151392 152376
Accrued Interest 2307 154683
05/27 For Settlement 05/28:
Bought 150000 UST Bills,
07/01/04 @ 0.86% D,
Unit Price = 999.19 149879 4804
06/07 For Settlement 06/08:
Bought (to cover
short) 150000
US Treasury Bonds
5.375%, 02/15/31 @
985.30 (YTM=5.48%) 147795 -142991
Accrued Interest 2553 -145544
06/07 For Settlement 06/08:
Sold 150000 UST Bills,
07/01/04 @ 0.93% D,
Unit Price = 999.41 149912 4368
06/15 For Settlement 06/16:
Sold Short 200000
US Treasury Bonds,
5.375%, 02/15/31
@ 999.34 (YTM=5.38%) 199868 204236
Accrued Interest 3643 207879
06/15 For Settlement 06/16:
Bought 205000 UST Bills,
07/01/04 @ 0.91% D,
Unit Price = 999.62 204922 2957
06/24 For Settlement 06/25:
Sold Short 100000
US Treasury Bonds,
5.375%, 02/15/31
@ 1007.86 (YTM=5.32%) 100786 103743
Accrued Interest 1956 105699
06/24 For Settlement 06/25:
Bought 105000 UST Bills,
07/01/04 @ 0.93% D,
Unit Price = 999.85 104984 715
06/28 For Settlement 07/01:
Bought 1415000 UST Bills,
09/30/04 @ 1.355% D,
Unit Price = 996.57 1410147 -1409432
07/01 Treasury Bill Maturity
Principal 1408179 -1253
Interest 1821 568
06/30 For Settlement 07/01:
Sold Short 140000
US Treasury Bonds,
5.375%, 02/15/31
@ 1010.70 (YTM=5.30%) 141498 142066
Accrued Interest 2864 144930
06/30 For Settlement 07/01:
Bought 145000 UST Bills,
09/30/04 @ 1.29% D,
Unit Price = 996.74 144527 403
---------------------------------------------------
Summary of Holdings as of 07/01 Settlement
------------------------------------------
Long: 1560000 UST Bills, 09/30/04
Short: 440000 UST Bonds, 5.375%, 2/15/31
---------------------------------------------------
|
