-34-
involved futures contracts in copper, gold, 90-day Treasury bills,
sugar, GNMA’s, and 30-year U.S. Treasury bonds.27
Mr. Maduff focused on the GNMA’s and bond trades. He opined
that the GNMA and bond28 trades appear to have been intended to roll
gains from 1980 into 1981, and in fact succeeded in rolling
$695,156.25 of gains into 1981. In addition, because these trades
involved contracts not maturing until 1982, they had the potential
of generating long-term gains and short-term losses. After
examining these transactions, Mr. Maduff concluded that these
trades did not have any profit motive or potential.
The GNMA and Treasury bond transactions were established on
June 26 and 27, 1980, with the purchase on each day of: 15 March
27 With the exception of the GNMA’s and bonds, all of the
transactions were initiated by July 1, 1980, and closed out by
Dec. 31, 1980. Thus, Mr. Maduff did not perform a detailed study
of the copper, gold, 90-day Treasury bill, or sugar transactions
because it was clear that they were not used to postpone income
recognition from one year to the next. Also, they did not have
the potential for long-term capital gains because all were closed
out in less than 6 months.
28 Treasury bond futures contracts and GNMA futures
contracts are similar instruments. Both consist of 30-year debt
instruments with a $100,000 face value and a nominal 8-percent
“coupon”. Bonds are obligations of the U.S. Government; GNMA’s
are mortgage-backed debt instruments guaranteed by an agency of
the U.S. Government. The primary difference is that, in periods
of falling interest rates, GNMA’s are subject to prepayment while
bonds are not.
In addition, these debt instruments, which on their
face provide a constant income flow for approximately 30 years,
will fluctuate in value with interest rates. However, a 3-month
spread in either bonds or GNMA’s will tend to be stable because
that spread represents only the difference between 90-day
interest rates and 30-year interest rates for a 90-day period
rather than 30-year interest rates themselves.
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