Suppose you think negative interest rates are ludicrous that you want to profit from them. Suppose you aren't really concerned with timing and so you are going to "buy and hold" this trade. Suppose you are a retail trader and you don't necessarily have a huge amount of capital or you want to "invest" in this trade over time (i.e., dollar cost average). What is the best way to short negative yielding bonds or rates so that you get paid while you wait for the inevitable day of reckoning? And what is a good way of doing this if you want to add only limited amount of capital at a time?
Trading negative interest rates
- Thread starter sprstpd
- Start date
I think you are confused. There are no negative nominal rates here. They are referring to negative "real" rates which factors in inflation. Usually to get negative nominal rates banks charge a "fee" that is built into the price of the interest rate product thereby creating a negative nominal yield. But the debt instrument itself does not pay you a yield if you are short it. I think you are confused by all this.
I think you need to be more specific about what your talking about doing.... Shorting treasuries is a very difficult thing to do... As you hold them they roll toward maturity and speaking in terms of interest rate curve your Rollin down the curve... Meaning the bonds notional value goes up over time because of the time preference premium between long term and short term maturities... Your essentially slowly changing over time to a shorter term maturity as you hold your short position in the bond... This is my understanding... There are other was to express interest rate trades that don't even use the bonds themselves.. Mav or martinhoul would probably be better at explaining
Dont know about negative rates but just maybe "framing" this as "I think the fed wont
raise the fed funds rate for 3 years" . Buy the GEZ18 Eurodollar futures contact. Closed
today at 98.04
That price will drift/trade , 1 mill contracts /day to 100-3 month Libor rate. Libor , today is 32 bp. , a 25-28 bp. premium over the 3 month t-bill rate . All things equal( 3 month UST and 3 month Libor) then at expriation GEZ15 will close at 99.68 in DEC, 2018. That would be a profit
of 164 bp. At $25 per bp. Magin with IB used to be $700 per comtract but that has gone up
recently. So, a monster return on margin, small return on 1mill. notional.
These contracts are available out 10 years. Settle/marked every day, very liquid, big money uses these.
Buy and hold.
raise the fed funds rate for 3 years" . Buy the GEZ18 Eurodollar futures contact. Closed
today at 98.04
That price will drift/trade , 1 mill contracts /day to 100-3 month Libor rate. Libor , today is 32 bp. , a 25-28 bp. premium over the 3 month t-bill rate . All things equal( 3 month UST and 3 month Libor) then at expriation GEZ15 will close at 99.68 in DEC, 2018. That would be a profit
of 164 bp. At $25 per bp. Magin with IB used to be $700 per comtract but that has gone up
recently. So, a monster return on margin, small return on 1mill. notional.
These contracts are available out 10 years. Settle/marked every day, very liquid, big money uses these.
Buy and hold.
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Maybe enter on any threats of interest rate hikes for better entry...I like Eurodollars
You know, I need to think seriously about expressing this belief this way as well on a contract a few years out with the first area of comcern as "what would be the effect on GEZ18 with a surprise or planned rate hike along the way. In any contract the 25bp. hike would be priced immediately as a 25*25 dollar loss plus a new probability of the next 25 or 50 bp hike priced in.
In the recent past (june?) , the December 2015 contract had a full 25 bp + a 50ish percent probability of another 25 bp. hike before the DEC 2015 expiration priced in.
So, caution as it seems these bets slowly drift up (with normal PA similar to the nearer end of the treasury curve) BUT can shock in the other direction.
However, if one did hold to expiration, then breakeven (giben todays Libor premium), would be at a 3 month t-bill rate of about 1.5%. Thats maybe 4 or so
25 bp hikes of the fed funds rate. Ya think.
Another way of viewing this is that it would very likely work as SP500 fell from 2100 to 1700 to hell and maybe up to , what , 2300?
In the recent past (june?) , the December 2015 contract had a full 25 bp + a 50ish percent probability of another 25 bp. hike before the DEC 2015 expiration priced in.
So, caution as it seems these bets slowly drift up (with normal PA similar to the nearer end of the treasury curve) BUT can shock in the other direction.
However, if one did hold to expiration, then breakeven (giben todays Libor premium), would be at a 3 month t-bill rate of about 1.5%. Thats maybe 4 or so
25 bp hikes of the fed funds rate. Ya think.
Another way of viewing this is that it would very likely work as SP500 fell from 2100 to 1700 to hell and maybe up to , what , 2300?
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I probably am very confused, but Gundlach and his views on negative yielding debt led me to start this thread. For example:
http://www.bloomberg.com/news/artic...nst-german-debt-plan-has-one-very-big-problem
Again, they are NOT negative nominal yields. They are negative "real" yields. And yes, banks will charge them to collateralize the trade. And "if" we were to hit another recession which is actually "highly" likely in the next two years, these trades could blow up big time. I think the trade of the lifetime could be betting the other way.