thanks. that's one of the good ones.
Who are the idiots buying bonds for 1% interest?
- Thread starter misterno
- Start date
thanks. that's one of the good ones.
No it's not.
Let's say I buy 2's today, betting that the economy will go nowhere. So I keep them for a year, collect my 1/2% yield, and if rates stay unchanged that's my best scenario - I've made 1/2%.
The worse scenario is that the fed raises rates to say 3% over the next year, which is very plausible considering what the fed's moves were coming out of the last recession. As a result, the value of my bonds drops maybe 3% and after clipping my coupons I'm down maybe 2.5%.
In other words, I've got an interest rate risk that's 5x my best case scenario profit. That's pretty horrible. Obviously back of the envelope, but the point is that the risk in long bonds HUGELY outweighs the reward if you're right.
No, you told Martin you would feel safer in CASH vs buying the 1% notes. That statement is a CONTRADICTION.
Uh, no it's not. In bonds I have interest rate risk. In cash, I have none. The only time it would be a contradiction is if I decided a priori to hold my bonds to maturity no matter what, at which point they will outperform cash but my liquidity goes down the shitter. With T-bills you could make an argument that might be a reasonable tradeoff. But not with the 2s and 5s.
In practice long bonds is currently a VERY risky trade.
Quote from shortie:
TLT +2% today
His followers will buy today, so the clock will start tomorrow for P&L. Also, use the 10-year and not the 20 to 30 years. Keep the score Shorite, we need a fair arbiter.
The reason the risk reward is bad is because its obvious to the market what is going to happen, risk reward is an overrated trading concept, what matters is the EXPECTATION. I would happily sell naked options all day as a long I was quite confident my premiums we're too high and I'm properly capitalized, even though the avg ET would hammer that strategy and say my risk reward is bad
Except it's not obvious. For example, US equities still have a fair amount of growth priced into them. Those two markets are of roughly equal size, and they can't both be right. I don't claim to know which is right and which is wrong, but in order to make money I really don't need to know.
In your option trade, probs on your OTM short options are more than 50% on your side, and they rise with time. In Big D, one can assume 50-50. So it is not the same comparison.