Bonds for the small trader

[Kicking]

Well I don't know what you are talking about.
Do you think CTA's care about convexity, do you think trend following programs care about duration ?

And actually I am ignorant enough to understand that duration is pretty much worthless. It's a purely theoritical concept that gives an estimate in the case of a small parallel shift in the curve. Our discusion is about trading futures off the futures, I don't see why you are talking about duration, and convexity other than convexity will make prices change asymetrical for a same change in yield. Even if I held a portfolio of bonds I wouldn't give a damn about duration. I would look at average maturity to get a better idea of my risk.

But now I understand wher you are coming from. As I said we don't do do the same thing. We are not in the same league you would say. And you don't look at charts nor do you know much how to use them.

 

[sjfan]

Okay then... I suppose this is my cue to exit this conversation. Do yourself a favor - don't ever move past treasuries and trade things like corporate bonds and munis, which are quoted and traded on spreads. Go tell a real bond trader that duration is not something he should care about and he'll laugh you off of the floor. (I'm not sure you know what the word theoretical means in this context).

(oh, I do know for a fact that institutional trend following programs in bond futures adjust for duration)

Quote from Kicking:

Well I don't know what you are talking about.
Do you think CTA's care about convexity, do you think trend following programs care about duration ?

And actually I am ignorant enough to understand that duration is pretty much worthless. It's a purely theoritical concept that gives an estimate in the case of a small parallel shift in the curve. Our discusion is about trading futures off the futures, I don't see why you are talking about duration, and convexity other than convexity will make prices change asymetrical for a same change in yield. Even if I held a portfolio of bonds I wouldn't give a damn about duration. I would look at average maturity to get a better idea of my risk.

 

[Martinghoul]

Quote from sjfan:


However, this guy wants to do technical analysis on bond prices. My point is that without accounting for duration and the convexity effect on that duration, indicators will be systematically biased due to the duration effect. So the signal he gets will be biased.

Well, I assume TA most likely implies very short holding periods, which, to me, effectively implies constant position duration for the lifetime of the trade. Secondly, the trade would never be held over large moves, which implies negligible effects of convexity on price. Finally, who knows, maybe the OP is applying TA to yields, in which case, with the position sizes in question, convexity is a complete non-issue...

So my point still stands, I don't think what you're saying is relevant in the the original post's context.

Quote from sjfan:

Oh, and by the way - what does this expression mean? I have to admit I have never heard of this one.

Means 'everything has its place', 'to each his own' etc

 

[Kicking]

I don't "trade" cash (except that I would consider treasuries)
I don't have the order flow and inside info for that . And yes you can adjust for all kinds of things , spend your time devising plenty of sophisticated models. The question is always, how is your trading ?

 

[sjfan]

If he's analyzing intra-day, I can agree with your perspective from that point. Duration isn't going to change in a practically significant way unless there's a big rates change. But the rate change needed to shift duration in an appreciable way for a retail guy is probably not all very likely.

Quote from Martinghoul:

Well, I assume TA most likely implies very short holding periods, which, to me, effectively implies constant position duration for the lifetime of the trade. Secondly, the trade would never be held over large moves, which implies negligible effects of convexity on price. Finally, who knows, maybe the OP is applying TA to yields, in which case, with the position sizes in question, convexity is a complete non-issue...

So my point still stands, I don't think what you're saying is relevant in the the original post's context.


Means 'everything has its place', 'to each his own' etc

 

[sjfan]

I don't have order flow or inside information either; I'd go to jail if I trade on that information (and worse than that, throw away my entire career). Bond management is done using durations, which is anything but a theoretical concept (average maturity is a very poor measure of interest rate risk given it won't account for difference between bond coupons, which is one of the primary differentiator of risk).

Anyway, I think you are more interested in telling me that I'm "wrong". Which is fine I guess, but as a bond trader, it's not a conversation that adds any value from my perspective.

Quote from Kicking:

I don't "trade" cash (except that I would consider treasuries)
I don't have the order flow and inside info for that . And yes you can adjust for all kinds of things , spend your time devising plenty of sophisticated models. The question is always, how is your trading ?

 

[day4night]

Well, another nice thing about eurodollars -- no coupon (so no duration question).

But anyway, why can't you trade eurodollars technically? I personally trade on sentiment, techs plus a general rate outlook for longer trades. I use techs a lot and they've helped me to see when I've been wrong in my view. Also for shorter trades sometimes I trade almost purely on techs. I've been successful in these trades overall -- knock on wood. I've found technicals to be equally helpful in calendar spreads. By techs I'm mainnly talking trendlines, overbought/oversold, momentum, & volatility indicators.

I don't know what other people think, but I've personally found interest rate markets, for all of their mathyness, to be very sentiment driven.

Seems also that eurodollar options farther out in the curve, with their low theta, can be very good for contrarian plays.

 

[sjfan]

As a pedantic point: no coupon doesn't mean no duration; It just means that bonds of the same maturity will be "comparable" without making adjustments.

I didn't say you can't trade eurodollars (or for that matter, anything else) technically. My point is that what you should analyze isn't the raw price. This is especially true if you want do any kind of analysis beyond very short time horizons. The price need to be first "transformed" into something that filters away all the structural bond elements that, like coupon, maturity, call/put (not too applicable here) caps and floors.

It's exactly like you wouldn't do tech analysis on raw options pricing, would you? FI pricing isn't as "kludged", but the same idea applies.

Quote from day4night:

Well, another nice thing about eurodollars -- no coupon (so no duration question).

But anyway, why can't you trade eurodollars technically? I personally trade on sentiment, techs plus a general rate outlook for longer trades. I use techs a lot and they've helped me to see when I've been wrong in my view. Also for shorter trades sometimes I trade almost purely on techs. I've been successful in these trades overall -- knock on wood. I've found technicals to be equally helpful in calendar spreads. By techs I'm mainnly talking trendlines, overbought/oversold, momentum, & volatility indicators.

I don't know what other people think, but I've personally found interest rate markets, for all of their mathyness, to be very sentiment driven.

Seems also that eurodollar options farther out in the curve, with their low theta, can be very good for contrarian plays.

 

[Nattdog]

if no one has mentioned it the obvious answer is to trade the 2yr or 5yr note futures. The shorter duration means they are typically going to be a lot less volatile than the 10 or 30 year futures and are consequently more manageable for the small account.

 

[Kicking]

day4night,

I guess one can trade ED off charts, the one I just looked at is just succession of dots , but it's day session. I am not inspired.

Otherwise, you talk about sentiment, what do you look at ?
I remember there were 2 or 3 indicators, that Crescenzi sometimes talk about, call to put, COT reports, and some others I forgot.

sjfan : by inside info I mean the info dealers are privy about , working the phones, talking to people , then knowing the order flow, what is being issued etc. That islegal inside info we don't have us poor little retail traders out of your league.