Bonds risks and margin

[salamanderforex]

https://www.aaii.com/investing/article/3-why-bond-prices-go-up-and-down?

Thank you; this was one of the best articles I have read on bonds.

Questions:

1- If I buy a bond with a maturity term of 1-year and wait the 1 year for it to mature, would I automatically receive the full value (in my account) that I paid for it at time of buying? (regardless of what happens to interest rates; goes to +20% or -20%)

2- If I do receive my full capital back, I am assuming that bonds prices are more expensive than their face value when someone wants to buy them and that is how risk is added to bonds so that I will end up with buying more than face value and since interest rate changes I could be loosing due to that?

3- Is it possible to buy a 1-year term bond at it's par value? are those newly issued bonds from government that one has to buy at a specific time to get at par value or that is not possible as gov for example auctions them?

4- What is the difference between A, AA, and AAA bonds? are these something like municipality bond (can go bankrupt easier) VS state bond (less like to go bankrupt than a municipality) VS federal bonds (very little risk of US federal gov going bankrupt). Please give some examples if mine are not correct.

5- Overall, seems like bonds are totally a gamble of interest rates (excluding default of bond issuer). If that is correct, isn't that a very hard thing to predict given the FOMC meets only 8 times in a year and really no one knows what they might say and do? What sort of indicators do bond investors have that help them predict the direction of interests so that they buy bonds? (I am assuming bonds are not in high demand when interest rates are rising or if there is a strong feeling that interest rates might rise. So at that time, what do investors think that they even buy them?)

Thanks,

 

[Sig]

I used to keep T-Bills in my futures account, but that practice isn't really supported these days. I've kinda gone the other way since the Man Financial and PFG Best debacles - I keep modest capital in my account and if they need margin I can wire it in 30 minutes. I've had some clients get trapped by those first two instances I noted above; while they were eventually made whole, the time delay and anxiety and lost opportunities cost was definitely a bitter lesson.

When you say not supported you mean brokers won't do it for you or the concept doesn't work? I keep my funds in treasuries in my name at the broker and trade off them as collateral. My understanding is that in a bankruptcy situation I get those back on demand because they're actually in my name and therefore not an asset of the firm that the bankruptcy has jurisdiction over. So it may be a few days to weeks for the dust to settle before I can retrieve them, but not the months to years of everyone in the creditor bucket. If my understanding is incorrect I may move toward more of what you're describing, although at the end of the day you still have to hold the money in some institution that could fail and it's not worth opening accounts at dozens of banks to get full FDIC protection.

 

[bone]

I am referring specifically to FCM's. (futures commission merchants)

When you say not supported you mean brokers won't do it for you or the concept doesn't work? I keep my funds in treasuries in my name at the broker and trade off them as collateral. My understanding is that in a bankruptcy situation I get those back on demand because they're actually in my name and therefore not an asset of the firm that the bankruptcy has jurisdiction over. So it may be a few days to weeks for the dust to settle before I can retrieve them, but not the months to years of everyone in the creditor bucket. If my understanding is incorrect I may move toward more of what you're describing, although at the end of the day you still have to hold the money in some institution that could fail and it's not worth opening accounts at dozens of banks to get full FDIC protection.

 

[salamanderforex]

I used to keep T-Bills in my futures account, but that practice isn't really supported these days. I've kinda gone the other way since the Man Financial and PFG Best debacles - I keep modest capital in my account and if they need margin I can wire it in 30 minutes. I've had some clients get trapped by those first two instances I noted above; while they were eventually made whole, the time delay and anxiety and lost opportunities cost was definitely a bitter lesson.

I read on both cases you mentioned. I am surprised that people had to wait couple years to get 90 or 44 cents on the dollar. Wasn't FDIC or SPIC covering their losses? or are those losses related to more than $500k ($250K SPIC and $250K FDIC).

 

[bone]

No, FDIC and SPIC do NOT cover trading accounts. And being made whole means 100% - which after a period of months the futures exchanges DID indeed make customers whole.

The problem at PFG Best was fraud and theft on a massive scale by the CEO, and it took a considerable forensic accounting effort to accurately recreate proper customer equity balances. The trading exchanges (mostly CME) made customers whole first before they recouped funds from the CEO. At Man Financial, the problems were related to improperly segregated customer funds versus firm funds against the massive losses the CEO took on a disastrous European bond bet. Again, it took a substantial forensic accounting effort to figure out who owed what to whom.

But nobody got “90 or 44 cents on the dollar” as you erroneously stated. In the end it was the futures exchanges that guaranteed the customer funds - as they always do.

I read on both cases you mentioned. I am surprised that people had to wait couple years to get 90 or 44 cents on the dollar. Wasn't FDIC or SPIC covering their losses? or are those losses related to more than $500k ($250K SPIC and $250K FDIC).

 

[salamanderforex]

No, FDIC and SPIC do NOT cover trading accounts. And being made whole means 100% - which after a period of months the futures exchanges DID indeed make customers whole.

The problem at PFG Best was fraud and theft on a massive scale by the CEO, and it took a considerable forensic accounting effort to accurately recreate proper customer equity balances. The trading exchanges (mostly CME) made customers whole first before they recouped funds from the CEO. At Man Financial, the problems were related to improperly segregated customer funds versus firm funds against the massive losses the CEO took on a disastrous European bond bet. Again, it took a substantial forensic accounting effort to figure out who owed what to whom.

But nobody got “90 or 44 cents on the dollar” as you erroneously stated. In the end it was the futures exchanges that guaranteed the customer funds - as they always do.

I didn't read a lot on either...you can very well be right.
I read this article on the 49 cents on dollar (stand corrected by by 5 cents) for PFG (if that is the same PFG). Again I just skimmed these so I get the idea of what you are pointing to. Thanks for the history.
https://www.forexfraud.com/news/peregrine-financial-group-major-scam-u-s-forex-futures-market/


For no coverage from SPIC I think you mean they don't cover fraud but cover other types of bankruptcies or risks due to no fraud?

Since we are on the topic, how about iiroc? Do they cover the cash/equities or does anyone cover the brokerage account just like it is protected by FDIC in a bank account (US) or CDIC (Canada)?

 

[bone]

Futures trading accounts are NOT bank accounts. Different uses, different account guarantees, completely different regulators and regulations.

I didn't read a lot on either...you can very well be right.
I read this article on the 49 cents on dollar (stand corrected by by 5 cents) for PFG (if that is the same PFG). Again I just skimmed these so I get the idea of what you are pointing to. Thanks for the history.
https://www.forexfraud.com/news/peregrine-financial-group-major-scam-u-s-forex-futures-market/


For no coverage from SPIC I think you mean they don't cover fraud but cover other types of bankruptcies or risks due to no fraud?

Since we are on the topic, how about iiroc? Do they cover the cash/equities or does anyone cover the brokerage account just like it is protected by FDIC in a bank account (US) or CDIC (Canada)?

 

[salamanderforex]

Futures trading accounts are NOT bank accounts. Different uses, different account guarantees, completely different regulators and regulations.

Let's say exchanges couldn't cover in those cases, then who would have? (If any).

I gather that you say it's best to keep more cash in a bank account with FDIC insurance (get small interest) for example and simply use margin from a broker account instead of risking the money in case broker goes belly up. This makes sense except for I don't know who can wire transfer after banks close within 30 minutes if needed. I am not sure if for example IBKR even accepts wire within 30 mins even if it is sent during business hours. But then again one must remain watch with margins, however, a big dip and big rise can happen quickly like in March and be a huge loss if enough cash is not in account as I assume broker liquidates very quickly without asking.

Do you do online wire transfer which is very quick?

Is there any other way to guard the cash in a broker account (by some third party insurance for example) in case you need that in account to keep an account with high risk rolling?

 

[salamanderforex]

When you say not supported you mean brokers won't do it for you or the concept doesn't work? I keep my funds in treasuries in my name at the broker and trade off them as collateral. My understanding is that in a bankruptcy situation I get those back on demand because they're actually in my name and therefore not an asset of the firm that the bankruptcy has jurisdiction over. So it may be a few days to weeks for the dust to settle before I can retrieve them, but not the months to years of everyone in the creditor bucket. If my understanding is incorrect I may move toward more of what you're describing, although at the end of the day you still have to hold the money in some institution that could fail and it's not worth opening accounts at dozens of banks to get full FDIC protection.

I am leaning towards your method for one reason: high risk trading which requires high margin requirement. I am assuming you are doing it for the same reason. @bone definitely has a point about keeping modest balance but it won't be enough for high risk trading and also keeping cash in a bank is not ideal in terms of income because it has to get locked one way or another and can't really wire that back to market (will loose the potential income).

Can you please let me know what sort of bonds you keep that gives you peace of mind and also a little bit of income when needed.

 

[bone]

If I can make a suggestion: contact an FCM customer rep, honestly tell them what products and time frames you will be trading, and inquire about using a Treasury Bill or Note as collateral. You are going to have to provide liquid cash for your daily margin requirements regardless. All of this is rather speculative otherwise. SIG is likely not trading the same markets as you are - and if, as you suggest, you will be trading “high risk” products and strategies most of what you’ve been getting at is immaterial.

Can you please let me know what sort of bonds you keep that gives you peace of mind and also a little bit of income when needed.