Lock the borrowing interest rate—does that really mean the books are nailed down?
Before, I had a very simple understanding of TermMax: once the borrowing rate is locked, the costs are fixed, and the strategy is naturally easier to calculate.
Later, when I read the FAQ, I found that this understanding was only half correct.
TermMax can indeed fix the interest rate on the borrowing side, but the assets you use as collateral—their returns aren’t necessarily fixed.
The official example is very straightforward: if the collateral is a fixed-income asset like PT, then the yield associated with GT is relatively certain; but if the collateral is a floating-yield asset, then how much you ultimately earn will still track market changes.
For example, my borrowing cost is locked at 6%.
The collateral asset is currently able to generate a 10% return. It looks like there’s a 4% gap in the middle, so the books are easy to calculate.
The problem is: the 6% is locked in, but the 10% isn’t.
After some time, if the collateral asset’s yield drops to 7%, the space left is only 1%. If it then drops again to 5%, the borrowing cost is still that same locked borrowing cost, and the original interest-rate spread simply disappears.
That’s also the pretty obvious change I’ve noticed in TermMax recently:
Before, when I saw “Fixed Rate,” I would instinctively interpret it as “this strategy won’t change later.”
Now I break it apart and look at it differently.
Having a fixed financing cost is one thing; how much you can earn by using that financing is another.
What TermMax helps users eliminate is one variable—not all market risk at the same time.
In fact, because the borrowing side is already fixed, I think the other end is what’s more worth watching.
Otherwise, it’s easy to end up in a situation like this:
The interest rate really hasn’t changed, but the money you end up making is completely different from what you calculated at the start.
So the next time I see a TermMax strategy that looks like it has a good spread, my first reaction won’t be to only look at the Borrow APR.
I’ll also ask one more thing:
The portion I’m using to earn yield— is that also fixed, or is it a different number today and another number next month?
That distinction matters a lot.
@TermMax #TermMax
Before, I had a very simple understanding of TermMax: once the borrowing rate is locked, the costs are fixed, and the strategy is naturally easier to calculate.
Later, when I read the FAQ, I found that this understanding was only half correct.
TermMax can indeed fix the interest rate on the borrowing side, but the assets you use as collateral—their returns aren’t necessarily fixed.
The official example is very straightforward: if the collateral is a fixed-income asset like PT, then the yield associated with GT is relatively certain; but if the collateral is a floating-yield asset, then how much you ultimately earn will still track market changes.
For example, my borrowing cost is locked at 6%.
The collateral asset is currently able to generate a 10% return. It looks like there’s a 4% gap in the middle, so the books are easy to calculate.
The problem is: the 6% is locked in, but the 10% isn’t.
After some time, if the collateral asset’s yield drops to 7%, the space left is only 1%. If it then drops again to 5%, the borrowing cost is still that same locked borrowing cost, and the original interest-rate spread simply disappears.
That’s also the pretty obvious change I’ve noticed in TermMax recently:
Before, when I saw “Fixed Rate,” I would instinctively interpret it as “this strategy won’t change later.”
Now I break it apart and look at it differently.
Having a fixed financing cost is one thing; how much you can earn by using that financing is another.
What TermMax helps users eliminate is one variable—not all market risk at the same time.
In fact, because the borrowing side is already fixed, I think the other end is what’s more worth watching.
Otherwise, it’s easy to end up in a situation like this:
The interest rate really hasn’t changed, but the money you end up making is completely different from what you calculated at the start.
So the next time I see a TermMax strategy that looks like it has a good spread, my first reaction won’t be to only look at the Borrow APR.
I’ll also ask one more thing:
The portion I’m using to earn yield— is that also fixed, or is it a different number today and another number next month?
That distinction matters a lot.
@TermMax #TermMax