What broker will let me trade European bonds?

H

hft_boy

Hi,
I want to short the Spanish/German bond spread, i.e. sell German bonds and buy Spanish ones. Which broker will let me do so? I have an account with Interactive Brokers, but they only have trading of American bonds, apparently.
 
Thanks lionline, I PMed you.

Quote from just21:

You have access to german and italian bond futures from eurex on ib.
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Thanks - I already looked into these though. There's BTP, which I think delivers a basket of Italian bonds, and there's also OAT which is the equivalent for French bonds.

I'm not particularly interested in these futures, because I couldn't find an exact equivalent for German bonds, and I don't particularly want to construct a synthetic basket of German bonds, mostly because of capital constraints.

Also, the Italian bonds aren't as cheap as Spanish bonds, so I'm thinking that the opportunity there isn't as good. The Spanish/German 10 year yield is 7/1.5, I mean jeez. In comparison, the Italian/French yield is 'only' 5.9/2.7, or about half as much. So I do want to buy Spanish bonds directly and not proxy them through Italian bonds.
 
edit

Please look at the futures again. They do not deliver a basket, rather they will deliver a bond, which will be the cheapest-to-deliver. In any case, you will not care about that as you only need exposure to the instrument, not the instrument itself.

You are going to need someone that will let you do the repo to short the cash bonds. Hard to do unless you have enough capital to get the relationship.
 
Quote from EquityGuy4321:

edit

Please look at the futures again. They do not deliver a basket, rather they will deliver a bond, which will be the cheapest-to-deliver. In any case, you will not care about that as you only need exposure to the instrument, not the instrument itself.

You are going to need someone that will let you do the repo to short the cash bonds. Hard to do unless you have enough capital to get the relationship.
More...

Thanks. I am confused by the contract descriptions (from Eurex website):

futures contracts based on a notional long-term debt instruments issued by the Federal Republic of Germany, with a remaining term of 8.5 to 10.5 years. It bears a notional coupon rate of six percent. Contract value is EUR 100,000 and the minimum price change is 0.01 percent, equivalent to a value of EUR 10.
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and the Italian future underlying are

Notional short-, mid- and long-term debt instruments issued by the Republic of Italy with a remaining term of 2 to 3.25 years (short-term), respectively 4.5 to 6 years (mid-term) and 8.5 to 11 years (long-term) with a notional coupon of 6 percent. Mid- and long-term debt instruments must have an original maturity of no longer than 16 years.
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My interpretation was that these futures deliver a basket, but apparently I am wrong on this point. Is there any way of figuring out exactly which bonds are the underlying, or should I, as you said, just not worry about this? In theory I would like to make sure that I am trading basically equivalent (i.e. same maturity) bonds.

By the way, what is a repo?
 
At any given point in the life of the contract one bond in the deliverable basket will be the cheapest-to-deliver (if you had to deliver a bond to someone, and you had a choice, you would deliver the one that would cost you least, right?). CTD is influenced by a number of things, such as current financing costs and the composition of the deliverable basket, but unless you want to take or make delivery (which almost no one ever does) the only thing you need to know is that the futures contract will trade like one bond... namely the CTD, and most of the effect will be in the general up/down movement of rates, so it is a second-order detail which bond is the CTD. The one thing that CTD does tell you is the DV01 of the bonds and, hence, the futures contract. If you are concerned about drift in the hedge ratio then you might want to keep track of the shifts in CTD (if there are any).

If you want to short a cash bond you have to find someone who will lend you the bond in order for you to sell it. This is a repo. Works much the same way as shorting a stock. So, you have to have an arrangement with a prime broker who will do this for you. Merlin Securities might be worth a shot since they specialize in smaller accounts, but you still have to have a good chunk in order for it to be worth their while.

I suggest you read up on LTCM and such since they famously blew up on these types of "convergence trades".
 
Quote from EquityGuy4321:

At any given point in the life of the contract one bond in the deliverable basket will be the cheapest-to-deliver (if you had to deliver a bond to someone, and you had a choice, you would deliver the one that would cost you least, right?). CTD is influenced by a number of things, such as current financing costs and the composition of the deliverable basket, but unless you want to take or make delivery (which almost no one ever does) the only thing you need to know is that the futures contract will trade like one bond... namely the CTD, and most of the effect will be in the general up/down movement of rates, so it is a second-order detail which bond is the CTD. The one thing that CTD does tell you is the DV01 of the bonds and, hence, the futures contract. If you are concerned about drift in the hedge ratio then you might want to keep track of the shifts in CTD (if there are any).

If you want to short a cash bond you have to find someone who will lend you the bond in order for you to sell it. This is a repo. Works much the same way as shorting a stock. So, you have to have an arrangement with a prime broker who will do this for you. Merlin Securities might be worth a shot since they specialize in smaller accounts, but you still have to have a good chunk in order for it to be worth their while.

I suggest you read up on LTCM and such since they famously blew up on these types of "convergence trades".
More...

Thanks for the comments everyone, very informative and helpful! Well, it looks like I don't have the capital to actually get in as an institutional trader, so it looks like futures are the way to go.

Also, I am familiar with LTCM -- I think the situation here is quite different. So far it has been looking like there is actually a chance of default by Italy or Spain; my assumption is that a coalition of Eurozone countries and possibly others, particularly the US and Japan, will find it politically err ... inviable to let Spain or Italy default, and that this hasn't been priced in yet by the market (although it looks like it already is starting to). Just a little of my reasoning behind the trade.
 
BTW, somebody PMed me with the following information, and wanted me to share it on forum:

Bloomberg DES page,

FBBU2 Comdty  Feedback Page 1/2 Futures Contract Description
FBBU2 Comdty Spanish 10yr Fut Sep12 MFM-Meff Renta Variable (Madrid)

I googled and got to http://www.bloomberg.com/quote/FBBU2:IND, and I get
"Quotes for FBBU2:IND aren't available on Bloomberg.com. Get other quotes."

Don't have access to the Bloomberg terminal, but somebody may be interested in this.
 
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