Global Macro Trading Journal

Daal said:
By being short the german futures, in theory, one is getting paid Euribor and paying out the bond yield right? So what is the carry now on rolling bunds and buxls futures?
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Well, I am not sure you're gonna get paid Euribor... Even if you were, recall that it's negative, so you're likely to be paying.

If you're short the German futures, you're (kinda) borrowing the bond in the repo mkt at (maybe) GC. That's the "funding" leg of the trade. Carry and rolldown for bunds is arnd 4.2bps per quarter and for buxl - arnd 2.1bps per quarter.
 
Martinghoul said:
Well, I am not sure you're gonna get paid Euribor... Even if you were, recall that it's negative, so you're likely to be paying.

If you're short the German futures, you're (kinda) borrowing the bond in the repo mkt at (maybe) GC. That's the "funding" leg of the trade. Carry and rolldown for bunds is arnd 4.2bps per quarter and for buxl - arnd 2.1bps per quarter.
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any cheap ways to put this trade on with options?
 
Daal said:
any cheap ways to put this trade on with options?
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It depends... You can always spend a little money to buy some optically cheap options. However, the old dictum of "you pay peanuts, you get monkeys" would definitely apply.
 
Martinghoul said:
It depends... You can always spend a little money to buy some optically cheap options. However, the old dictum of "you pay peanuts, you get monkeys" would definitely apply.
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The idea here is, if anyone bought Swiss or German bunds 4 years ago and went into a coma, a coma that he came out of today, he almost surely would be taking most (if not all) the profits from the trade and anyone would agree with doing that. What I'm suggesting here, a small short in the futures, equivalent to 1/3 or maybe 1/2 of the duration exposure of the portfolio (and how to extract the duration exposure size from a stock portfolio is a more difficult question but I believe it can be done). This is the equivalent to taking some profits off the table from the long duration/bond trend that has played out massively over the last few years and benefited everyone, stock, bond and real estate investors. I could argue that not doing that is what is risky
Why would this not be a good idea? Sure, there might be an extra cost to the short futures as compared to the outright bond sale but it should be small relative to the potential loss that will be averted if the person DOESN'T take some off the table
 
I mean, the 'stocks are cheap relative to bonds' is probably of one of most played out themes/crowded ideas right now. Taking some off the table seems prudent to me
 
The alternative is to sell stocks and hope for a correction to get back in. I think that is even riskier, because we dont know when rates will rise. Maybe it will came in the future, from ES 2800 down to 2300. But if a roll of short bund futures can be kept with a decently small yearly cost, then we dont need to know the timing, and get the upside from stocks from here
 
Anyone who is bearish in these bonds, surely would think a US bond fund with a duration of 20+ is being managed by a lunatic. But somehow they are comfortable with stocks, which (as I understand and seen some studies showing) have a duration that is even bigger than that (40 IIRC). That lunatic manager could decrease the duration of his fund by just shorting some buxl futures. Why shouldnt a stock investor do that (conservatively)
 
Unless you have liquidity or taxation concerns I don't see why one needs to be constantly invested. Think the market is going up? Buy back in again.

Only other argument I can think of is you want the dividend.

Daal you keep making the point about duration and we hear you, however if you are long ES at 2100 and you get stopped out at 2000, why can't you buyback in at 2150 if you see the upside is say 2500 or something? What argument do you have for being long and hedging other than what I already outlined?
 
jj90 said:
Unless you have liquidity or taxation concerns I don't see why one needs to be constantly invested. Think the market is going up? Buy back in again.

Only other argument I can think of is you want the dividend.

Daal you keep making the point about duration and we hear you, however if you are long ES at 2100 and you get stopped out at 2000, why can't you buyback in at 2150 if you see the upside is say 2500 or something? What argument do you have for being long and hedging other than what I already outlined?
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I learned the hard way, its very difficult to time in and out of the market in a multi-week multi-month basis. Its very certain way to underform. So if I sell all my positions because I'm worried about something, I will be selling an aweful lot of the time. Only to buy back in, transaction costs and slippage will cut down my edge in a significant way (a form of negative carry). Even stuff like valuations are tough to use to trade the markets
http://aswathdamodaran.blogspot.com.br/2016/08/mean-reversion-gravitational-super.html

But if you own a good portfolio and ocasionally put on some hedges here and there, not only it can help you through the turmoil, it can also boost returns by giving profits at the correction lows. Which you can then invest at good prices (similar to the way "rebalancing" adds to long-term returns)
 
Key about these hedges is that they must have (at worse) small negative expectation as a % of the likely annual return. So if I'm likely to earn 6% a year. I dont want to risk more than 1 to 1.5% of that in my hedging. Otherwise it becomes difficult to keep doing, then you throw the towel at the worst moment
 
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