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bone
ET Sponsor
Registered: Apr 2002
Posts: 4338 |
08-16-10 04:09 PM
I am actually long PIMCO overweight in the 401K and in the spec account futures options vis-a-vis a ZN bull spread ITM. I've started scaling modest profits by selling Dec 130 calls Friday, a few more today, looking for 128 in the ZN future to be all out the spec position in terms of positive deltas.
The 401K is long PIMCO and long commodities - dumb luck, both of them were not supposed to go up.
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The Big D
Registered: Nov 2009
Posts: 487 |
08-16-10 04:59 PM
Quote from Maverick74:
Let me try this one more time. As Bone correctly pointed out, traders get paid on price, not yield. YTM is useless as 99% of trader don't hold to maturity.
This argument doesn't make much sense - in order for a trader who buys bonds at < 1% yield to make money on price, he has to find someone else willing to buy them at an even lower yield. Even if multiple short term traders are involved, eventually someone has to hold the bonds to maturity.
What doesn't make sense is why that someone would be willing to accept a < 1% yield.
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Martinghoul
Registered: Jan 2009
Posts: 5641 |
08-16-10 05:06 PM
Quote from The Big D:
What doesn't make sense is why that someone would be willing to accept a < 1% yield.
What is so especially heinous about <1% yield? I know I keep beating the same dead horse, but do you know where 3y JGB yield is? People are happily buying those at 15bps, so, to them, 1% might look like a bargain here.
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The Big D
Registered: Nov 2009
Posts: 487 |
08-16-10 05:10 PM
Quote from Martinghoul:
What is so especially heinous about <1% yield? I know I keep beating the same dead horse, but do you know where 3y JGB yield is? People are happily buying those at 15bps, so, to them, 1% might look like a bargain here.
What's so heinous is the risk-reward profile. If the bet comes right, and we have a lost decade, you make 1% on your capital. If you're wrong, and yields go up, you could lose 20% on price. Cash seems a far-superior position.
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Maverick74
Registered: Mar 2002
Posts: 17366 |
08-16-10 05:12 PM
Quote from The Big D:
This argument doesn't make much sense - in order for a trader who buys bonds at < 1% yield to make money on price, he has to find someone else willing to buy them at an even lower yield. Even if multiple short term traders are involved, eventually someone has to hold the bonds to maturity.
What doesn't make sense is why that someone would be willing to accept a < 1% yield.
It makes perfect sense. Have you been watching short term rates lately? They are on fire. The 2's, 3's and 5's are exploding. Look, people trade rates like they trade pork bellies. They trade them to make money. And the longs are making a killing.
And you obviously missed my comment above about CDS's. Look, you need to understand the big picture here. This is a trillion dollar market. People are buying cash or trading the basis or spreading one against another to find value. And there is value all over the yield curve. And this value gets heavily leveraged and a lot of guys are making a lot of money.
You are seeing it as a plain vanilla trade. It is anything but. Plain vanilla trades went out the door in the early 80's.
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The Big D
Registered: Nov 2009
Posts: 487 |
08-16-10 05:18 PM
Quote from Maverick74:
It makes perfect sense. Have you been watching short term rates lately? They are on fire. The 2's, 3's and 5's are exploding. Look, people trade rates like they trade pork bellies. They trade them to make money. And the longs are making a killing.
And you obviously missed my comment above about CDS's. Look, you need to understand the big picture here. This is a trillion dollar market. People are buying cash or trading the basis or spreading one against another to find value. And there is value all over the yield curve. And this value gets heavily leveraged and a lot of guys are making a lot of money.
You are seeing it as a plain vanilla trade. It is anything but. Plain vanilla trades went out the door in the early 80's.
This is a non-explanation. The prices of 2s may have been exploding, but it's not going to do any more exploding. Bond have a price cap - no one's going to pay more than the principle plus the remaining coupons no matter what happens. And at 1% yield, we're approaching that cap.
Saying it's not a vanilla trade explains nothing. Why, given that short to mid term treasuries are at a point where they basically can't go up and yield nothing, would they be advantageous as part of any more complicated position? If XYZ spread with long treasuries is good, you have to explain why just XYZ wouldn't be better.
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