Anybody else short US 30 Bond
- Thread starter richard_m
- Start date
Whoa, m8, you're very very wrong here. I guess you're talking about the rate risk of the term repo here, but that's irrelevant...
The repo cashflows have nothing to do with the bond cashflows. Suppose I buy 100mm of the current 30y and I lend it out O/N. What do you think happens to my PNL if 30y rallies 100bps? What is the duration of my position?
Sorry, nel-san, I think there's actually a misunderstanding... I wasn't explaining what I meant clearly enough.
When I say repos, I am describing their use when you own the underlying bond and lend it out in the repo mkt. In such circumstances, repos have relatively negligible interest rate risk (relative to the duration of the position itself). You might have been thinking of repo as used by money funds, i.e. a short-term money mkt instrument, where you simply lend cash in exchange for govt collateral. The latter is not what I am describing, but I have a feeling it's what you're referring to.
To summarize my point:
Duration management using govt bonds with repos as an alternative to swaps is identical in terms of balance sheet consumption (i.e. cash outlay). In such a context, the only fundamental difference between swaps and bonds is credit: LIBOR basket vs govt.
I don't think I am wrong. The nominal maturity of the bond has nothing to do with the dv01. Notice all the graphs in the text books are always 'time to aturity' and not 'nominal maturity'? If an overnight repo is on a 10y or a 30y it doesnt have similar dv01 to actually buying a 10y or 30y otr. Let me ask you this. What is the difference in the IR risk between
a) 10-year note maturing in 1 day
b) an overnight repo on a 10-year on-the-run
c) and 10 year on-the-run?
a & b are small and equal for all intents and purposes. c is much larger than either.
Sorry, didn't see this post before writing my last one. I'd still have to differ though saying they are identical to swaps. Swaps let you target any portion of the curve you want. Wanna get the 20y-30y point..do a 20yforward starting 10y swap etc. Repo's are short term, and therefore only target the front range of the curve.
I can do any fwd, in any sector of the curve, using cash bonds with appropriately-weighted notionals. If I can then lend and borrow in the repo mkt, I will be able to get any duration I want without a significant cash outlay, just like I can do with swaps.
As I keep saying, you're not thinking of repos in the right context. I am not suggesting using repos for duration, like money-mkt funds do. I am talking about using repos to lend out bonds that you own already.
Seems, GDP numbers have already leaked....
Martinghoul - Yes you can get long duration with bonds. But this whole conversation was motivated by how to go about geting long duration without cash. So outright cash purchases are out the door. Then you brought up repos as a means to get long dated duration. You can't. Then you said I am not thinking of repo's in the right context. I understand them and no context whatsoever lets you add long dated duration via repos. If you wanna run with it go get some funding and write a thesis on it.
nel-san, with all due respect, you still don't get it...
Here's what I am saying, in simplest terms.
Suppose I want to be long 10y. I can recv fixed on a 10y swap, which will require no cash up front, as you correctly point out. Alternatively, I can buy 10y on-the-runs, in which case I will have to immediately pay, say $100MM, to my cpty. Now imagine that I have repo lines. In that case, I will immediately lend my bonds out O/N and get my $100MM (or a lesser amount, depending on haircut) cash back from my repo cpty. I have now funded my position, which means that I have my duration without committing cash. Please do tell me which part of this procedure doesn't work and why? I'd love to know, since I run my book the way I have described, day in, day out.
As I keep repeating, I am not talking about duration mgmt using repos. I am talking about financing your bond positions in the repo mkt. If you can do that, you can have your duration using cash bonds without consuming balance sheet, i.e. committing cash. Obviously, you will run the risk that you won't be able to roll your funding, which can be pretty horrible, as we all found out last year.