I look at the ETFs on offer, like TLT, and it seems that their price is remarkably stable, despite massive changes in the interest rate. It does not seem to reflect the inverse relationship you'd expect from price being the inverse of yield. Perhaps this is because the ETF receives the dividends and this is reflected in the price - or something. In any case, how is it possible to trade directly on the bond yield? Can this be done thru futures?
Yes to futures, but ETFs like TLT are fairly good at approximating the change in yield - I think what you are missing is the duration component: Price Return = Yield Change x Duration. So, for TLT, it's going to be approximately 1bp in yield change = approx -20bps in price change. Yes, there's also carry. You can't get away from that. Futures also have a carry component that's embedded in its pricing.
Thank you for the info, a couple of questions: TLT is the same price as it was Nov. last year, has there been no change in yield all that time? I don't understand the Duration aspect, do you mean the 20+ years for TLT? As you describe, its basically a beta factor of x -20, is that right? Thank you again for your help
US 30YR yield was 2.9941% on Nov 18, 2011. It's 2.9713% now. So yeah, it's pretty close. Duration is the technical price/yield relationship between bonds. It's like a beta in how its used, but not quite how its calculated. See: http://www.investopedia.com/university/advancedbond/advancedbond5.asp#axzz29eTGralQ <- more details than I care to write.
Futures are based on price not on yield. The yield market is the "cash" market. You need a substantial amount of money and be very analytical to trade cash. You will also need to have a relationship with a prime broker who will provide quotes, leverage, and repo's if you want to short. And preferably they are a government authorized dealer if you want the best prices. Accounts at these places usually have a 10mil minimum. That being said, if you are trying to trade, not invest, trade. Then the futures market is your best bet. Just be aware you are trading price not yield.