Long term carry trade mechanics

M

markettimer

Hi, I'm new to ET. I'd like to sell short 10-year Japanese government bonds and invest the cash in other assets. As I understand the typical carry trade, usually the borrowing is done at a short term floating rate, which could be done using something as simple as Forex.

I'd like to borrow yen at a fixed 1.4%, the current 10-year rate, using my account at Interactive Brokers. There is a market for JGB futures, which I guess is the most direct way to put on the trade. Are there any other options that I should consider? Anyone have experience with this trade?
 
Quote from markettimer:

The posting of this thread was delayed, so I'm bumping it in case anyone here has experience with a long term carry trade.
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To be completely honest, I don't think too many ET members do the carry trades. Whatever you hear, take with a grain of salt.

I'd also recommend trying investopdia... here are some articles:

http://www.investopedia.com/articles/forex/09/credit-crisis-carry-trade.asp

http://www.investopedia.com/articles/forex/07/carry_trade.asp

http://www.investopedia.com/articles/forex/07/carry_currency.asp
 
Quote from markettimer:

Hi, I'm new to ET. I'd like to sell short 10-year Japanese government bonds and invest the cash in other assets. As I understand the typical carry trade, usually the borrowing is done at a short term floating rate, which could be done using something as simple as Forex.

I'd like to borrow yen at a fixed 1.4%, the current 10-year rate, using my account at Interactive Brokers. There is a market for JGB futures, which I guess is the most direct way to put on the trade. Are there any other options that I should consider? Anyone have experience with this trade?
More...

The carry trade doesn't work very well when you are paying too much and have currency risk.

Why borrow yen at 1.4% when the IB rates for dollar margin loans over 100K are lower?

under 100K 1.68%
over 100K 1.18%
over 1 million 0.68%
over 3 million 0.43%
 
Quote from jeb9999:

The carry trade doesn't work very well when you are paying too much and have currency risk.

Why borrow yen at 1.4% when the IB rates for dollar margin loans over 100K are lower?
More...

Carry trade, by definition, has currency risk. The IB margin rates quoted are floating rates, and will change according to Fed policy. If I wanted to borrow in USD at 10-year fixed rates, I'm looking at 3.5%, based on Treasury yields.
 
Quote from markettimer:

I guess is the most direct way to put on the trade
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"Most direct" and cheapest is to forget all that, and simply buy-or-sell and hold forex futures, hoping to "earn" the roll(s).
 
Quote from markettimer:

Hi, I'm new to ET. I'd like to sell short 10-year Japanese government bonds and invest the cash in other assets. As I understand the typical carry trade, usually the borrowing is done at a short term floating rate, which could be done using something as simple as Forex.

I'd like to borrow yen at a fixed 1.4%, the current 10-year rate, using my account at Interactive Brokers. There is a market for JGB futures, which I guess is the most direct way to put on the trade. Are there any other options that I should consider? Anyone have experience with this trade?
More...
You won't be able to do the carry trade that you're thinking about using JGB futures.

There's two components to the sort of thing you're looking at. One is the carry on the bond, which you won't be able to realize, as you're not funding the bond yourself and the futures are already pricing the carry in.

The other bit is the FX carry, where you're essentially borrowing yen spot to lend in, say, Kiwi. That's best done in spot or fwd FX space.

If you want to be able to combine the two, you need to be able to sell cash JGBs short and do the repo on them, while doing the opposite on, say, Kiwi guvvies. Then you'll need to deal with your FX balances in spot/fwd space.
 
Quote from Rodney King:

"Most direct" and cheapest is to forget all that, and simply buy-or-sell and hold forex futures, hoping to "earn" the roll(s).
More...

I've thought about using this method, but the most distant futures I see offered are for December 2010. So you can only lock in the rate for 17 months. I'd rather lock in a 10- or 30-year fixed rate.
 
Quote from Martinghoul:

You won't be able to do the carry trade that you're thinking about using JGB futures.

There's two components to the sort of thing you're looking at. One is the carry on the bond, which you won't be able to realize, as you're not funding the bond yourself and the futures are already pricing the carry in.

The other bit is the FX carry, where you're essentially borrowing yen spot to lend in, say, Kiwi. That's best done in spot or fwd FX space.

If you want to be able to combine the two, you need to be able to sell cash JGBs short and do the repo on them, while doing the opposite on, say, Kiwi guvvies. Then you'll need to deal with your FX balances in spot/fwd space.
More...

I actually think the JGB futures combine both. Let's consider how the trade would respond to two shocks: (1) yen depreciation vs. dollar; (2) higher Japanese interest rates. In both cases, the JGB futures would fall. Currently the carry on a JGB futures should be negative, since short term rates in the US are below long term rates in Japan. However, if short term rates in the US rise, the trade will have a positive carry. Wouldn't rolling JGB futures have a payoff similar to shorting a constant maturity JGB bond in the repo market as you describe?

Is it feasible for retail traders to short sell bonds directly? I thought practice that was just for institutions.
 
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