Do you need a real edge trading the Bond market?

R

Ronjohn

Hi,

I have been studying the bond market for a few months. From what I have seen the bond market looks pretty straight forward. I noticed the yield curve, Fed interest rates, unemployment rates, stocks, effect the direction of this market. There is also good opportunities to hedge against the Euro or 5yr etc. Besides money management proper entry exit, what else is worth learning. The bonds market reminds me of more macro event. Could you please open my eyes to other things worth noting. Thanks
 
Ronjohn said:
From what I have seen the bond market looks pretty straight forward.
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The only thing "straight forward" in finance is a bank account, everything else gets progressively more complicated !

The theory of bonds is relatively simple and "straight forward".

The practice will soon show you that the textbooks don't tell you everything.

For example, have you considered :
- Concerns surrounding limited price disclosure (hint: unlike equities, bonds is a bit more of a closed shop)
- How you're planning to evaluate credit risk (hint: its hard to do right)
 
algofy said:
Do you need a real edge? Did you really ask that?
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I did .. Guilt as charged. I know you need an edge. With bonds you need a different kind of edge. I'm just looking for ideals about what to look for
 
If you really want to get into the guts of the yield curve, salomon Brothers did a few papers on understanding the yield curve that you can download for free. Highly recommend. Just google salomon brothers and yield curve. You'll find them no problem... I believe they are all legal downloads.
 
algofy said:
Do you need a real edge? Did you really ask that?
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The word "edge" gets thrown around too loosely on this site. If you sold a house at a $50K profit did you have an "edge"? If someone invests in an index tracking mutual fund and matches the current gains in the S&P 500 did that person have an "edge"?

The RAESarb that Atticus did as well as the few guys left in the S&P pit selling .30s and lifting .25 offers in the E-mini. Those are/were real measurable edges forward into time. Simply realizing a profit is not an "edge". If I flip a coin with you and I pay you $1 for Tails and you pay me $1 if I flip Heads it does not mean I have an edge over you if I show a profit and you show a loss. Take that same game and I pay you $0.90 for Tails and you pay me $1 if I flips heads, well now I have a provable edge/expected value even if you walk away as a winner.

You don't have to prove an "edge" to show profitability in Bonds. What you will need is some methodology to show consistent profits in whatever interval/time frame you are trading in. I am not saying that you cannot develop some type of perceived "edge". Anything is possible. But as someone else said, Bonds are more of a closed shop and the phone brokers keep it wide unless you trade size.

I have often wondered if it is possible to tape read Bonds via TRACE or some other method. For example, you can see in municipal bonds the market participants (both investor and inter-dealer) and some movement at 3:01pm on the tape for this muni, is it possible to coattail this type of stuff with old school tape reading methods? http://www.municipalbonds.com/bonds/issue/13063C5V8/
 
Do you need a real edge trading the Bond market?

Yes, in almost any business, trading or investing activity you need a competitive advantage or "edge" to derive consistent profits. That advantage can be financial, technological or skill and knowledge (just to name a few).
 
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MoneyMatthew said:
You don't have to prove an "edge" to show profitability in Bonds. What you will need is some methodology to show consistent profits in whatever interval/time frame you are trading in.
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Hate to burst your bubble here but what you stated here is exactly the correct definition of an edge. An overall probability of repeated long term success.
 
algofy said:
Hate to burst your bubble here but what you stated here is exactly the correct definition of an edge. An overall probability of repeated long term success.
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There is "edge" in the sense that you have great confidence in the ability to profit based on historical results then there is "edge" in the mathematical sense which is provable. Most trading systems are based on the assumption that they will continue to work going forward in time.

You can't prove that your moving average cross trading system has an edge even if you show a profit. A casino can prove it has an edge when it pays 35 to 1 on a roulette wheel that has 37 possible outcomes. Atticus proved he had an edge when he sold $1.14 May Iomega Calls at PHLX while simultaneously buying $1.10 May Iomega Calls at CBOE.

My point is that the word "edge" gets tossed around this site so frequently that it has lost its original meaning. Confidence in a future outcome and Proof of Expected Value are two different things.
 
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