Just bought a couple Swissy long bond contracts for a trade. They are trading on the EUREX/SOFFEX and have OK liquidity (unless you trade 100 lots).
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Global Macro Trading Journal
- Thread starter Daal
- Start date
Swiss govt bonds are extremely illiquid, because there's virtually no free float. And let me get this straight, you guys think buying a 10y bond that yields arnd 75bps is a good idea? That, if I am not mistaken, is one of, if not the lowest, 10y sovereign bond yield on the planet. I have to say, I am intensely curious what the rationale might be...
As to EUR blowup trades, hard to find them unless you dig deep, as a lot is priced in. I'd say, for me, it still has to be something arnd EURDKK, although it's no longer that obvious.
As to EUR blowup trades, hard to find them unless you dig deep, as a lot is priced in. I'd say, for me, it still has to be something arnd EURDKK, although it's no longer that obvious.
Quote from Martinghoul:
Swiss govt bonds are extremely illiquid, because there's virtually no free float. And let me get this straight, you guys think buying a 10y bond that yields arnd 75bps is a good idea? That, if I am not mistaken, is one of, if not the lowest, 10y sovereign bond yield on the planet. I have to say, I am intensely curious what the rationale might be...
There are in deflation, on real terms its actually a better deal with 10y USTs. Of course, if consider likely inflation going forward, things could change. I'm not saying this is some great deal, if I were to buy this it would be a 'buy high sell higher' type of thing, greater fool theory
Yeah, so I guess we're pricing a prolonged japanification of Switzerland that's worse than what actually happened in Japan, brought upon by ccy strength, rather than anything domestic. I, for one, find it difficult to price something like that as a central scenario. So, if Swissie guvvies had liquidity and/or a functional repo mkt, I would be short. In fact, I do confess that I am short longer-dated Swissie rates, in deriv space.Quote from Daal:
There are in deflation, on real terms its actually a better deal with 10y USTs. Of course, if consider likely inflation going forward, things could change. I'm not saying this is some great deal, if I were to buy this it would be a 'buy high sell higher' type of thing, greater fool theory
Next currency short is the GBP - against what I'm not sure yet.
This idea that the BoE is the hawkish central bank because Posen (an American and makes Bernanke look like Paul Volcker) didn't call for more QE is soon to be BLOWN UP SIR (Stripes reference for those of you too unfortunate to have ever seen it).
This idea that the BoE is the hawkish central bank because Posen (an American and makes Bernanke look like Paul Volcker) didn't call for more QE is soon to be BLOWN UP SIR (Stripes reference for those of you too unfortunate to have ever seen it).
Quote from Daal:
Interesting points.
With regards to Gold vs CRB. I'd say its complicated, the "CRB" includes interest income that is earned in the USTs that are used as margin against the futures position. Currently its 0%(The GCC ETF uses bills) but it won't be zero forever. The CRB index return against Gold in the 70's could be unfair due that(Imagine what kind of interest income one would have gotten, specially compounded. I don't have the numbers but I'd be surprised if they it doesn't beat physical gold), the income is also a cushion against vol
Also, its nice diversification.
With regards to long-term returns it seems that you are talking about REALLY long-term there. If that is so, I'd agree with the projections. If its more like 5-15 years I'd use different numbers
Yes but the point of commodities or gold in a portfolio is not really to make a return, it's to hedge against the scenario where the rest of the portfolio gets hammered i.e. stagflation or monetary debasement. Gold does that more reliably than commodities as a whole - gold trades pretty much solely as a monetary metal, whereas oil, grains, metals etc trade on industrial demand, agriculture trends & weather patterns, government regulations etc.
CRB is also more volatile, it goes down more in crashes, and it's potentially vulnerable to the indexing bubble, as well as the roll phenomenon that affects things like the natural gas ETF. CRB is also dominated by oil prices, making it highly correlated to stocks during recessions. Overall I"d say both the theory and the numbers show gold as a better portfolio diversifier than CRB.
About long-term returns, yes I was just listing what you'd expect from economic theory and long-term returns in the past. Stocks should return the free cash-flow yield + inflation, long-bonds should return their current yield, gold should track inflation, and cash should yield the same as long bonds minus the bond risk premium.
On a 5 year view then this is much different, but clearly it is impossible to predict what 5 year returns will be (if you could, you'd just go long the asset with the best anticipated 5 year return). The whole point of a diversified portfolio is the admission that asset-specific long-term prediction is impossible, therefore you just rely on probabilities (asset X is likely to return from y% to z% over 5-15 years) and diversify to smooth things out and provide as little correlation as possible between the assets.
When you set up a portfolio, you never know what it will return. However, if it is a sound portfolio, you DO know that it will earn the weighted market return of all its constituents, minus costs. A well-constructed portfolio should earn the best passive economic return that the market offers over that time period, without any need or ability to forecast. If you can 'forecast' too (even if only on a probabilistic basis), then you can run a trading portfolio on top of it and earn some alpha that way too. If you don't like drawdowns, run a very conservative portfolio - but even as little as 20% in stocks, 10% in bonds, and 10% in gold with 60% cash, is going to out-perform 100% cash in the long-run in all but the most bearish 2-3 year scenarios. And when it loses, it won't lose any more than a typical trading drawdown e.g. 10-15%. That is more than compensated for by your expected 2.5% annual return bonus - 10 years of that is 28%, from a portfolio that even 1929-32 could only cause a drawdown of say 10-15% peak to trough. 2008 would not even hit a 10% loss limit. And the rare times you do see a drawdown, you likely have a chance to buy stocks at bargain prices.
On the rare occasions when you get outright bearish on one of the assets, and want to have no exposure, you can just place a short in your trading account. Treat it like a separate naked short position, leave the index portfolio alone, and cover the trade once you are no longer bearish with conviction. Your portfolio will earn what it would have earned anyway (e.g. in 2008 would take a loss on the stocks and gold, offset somewhat by the bonds), but you'll have a profit on the trade to offset this, and have a passive portfolio ready to bank coin on any rebound. Net result is you reduce drawdown (or even turn a profit).
You keep your market timing where it should be - in the trading account. You keep your passive portfolio earning risk premia where it should be - in the investment account. In the long-run you should earn your net trading return + the net return of a passive diversified index portfolio. And since the two are either uncorrelated, or (for global macro) frequently negatively correlated, you should usually get the free lunch of higher returns with lower drawdowns. That beats sitting 100% in t-bills for a 10-30 year trading career. If the drawdowns are too much for you, just reduce the risk asset % in the passive portfolio until its 1929-32, 1937, 1973-74, 1987, 2000-2002, and 2007-2009 max DD would be low enough for you to stomach.
Quote from Daal:
-Sov debt crisis, usually its bearish to a currency, specially combined with banking worries. Leads to lots of people moving cash out
But for what reasons were sov debt crises usually bearish to a currency? Correlation is not causation, after all. Was it because of the sovereign debt, no other factors? Or was it because the countries involved had politically captured central banks that hyperinflated, or lacked competence and credibility; or had artificially high exchange rates before the crisis, which encouraged massive private sector dollar borrowing and set off a vicious reflexive downward spiral (e.g. Asia 97-98)? Or was it just that they were mostly small emerging market economies at the tail end of a huge credit boom which went pop?
There are a whole host of causal factors at work, and the EU situation is different in many of them than your typical currency collapse from the past. Germany and N Europe did not have a huge credit boom, the Euro was not a fixed currency, bunds are not in a sovereign debt crisis, they are a safe haven. Japan has had >100% GDP in debt for years and nothing happened except the Yen and JGBs soaring.
So, it's not as simple as saying 'government debt high + yields rising = currency down'. The Rogoff book is typical social science and thus subject to its limitations: no controlled experiments, numerous alternative possible causal factors, small sample size. For that reason the conclusions should be accepted only tentatively, and subject to immediate refutation from real world results, should they begin to contradict it.
There is however one far more reliable indicator - the market action. And so far, the market action in the Euro has been extremely resilient in the face of the recent bearish news. What would confound people more than a large Euro *rally* in the next few years? So, I would recommend having a contingency plan in place for what if the Euro starts to rise and begins to trade like a bull market.
Agreed w/ pretty much everything GoC said above. Given the complexity and severity of the issues surrounding EUR the currency, I have never really understood the fascination w/EURUSD. Sure, it's likely the most liquid and commonly traded FX instrument out there, but you have to take into account that a EURUSD position exposes you to a whole variety of "unknown unknowns", in addition to the "known unknowns" of other instruments. I generally try to stay as flat EURUSD as I can be.
personally I never understood the mantra that EUR should go down on European problems. that may be true in the limit (total EUR collapse) but any exit of a weak member (read weak fiscally AND externally) should send EUR higher. after all EU is not a trade deficit block (while US is)...
p.s. and I am with Martin on the EURUSD positioning...
p.s. and I am with Martin on the EURUSD positioning...