Yes it did pay to buy the downgrades in the past I would say today's selloff was more due to yesterday's failed Bund auction on top of the recent backup in yields in other high debt economies. Japan has been immune to the recent PIIGS movements, but the Bund auction probably was the final straw. As I said, not an enormous move, only in the context of the recent exceptionally low price volatility. For a carry (long JGB) trader probably 50% of their monthly PL was wiped out in one day. I'm not saying a bear market starts today, but at least we got some movement for a change!
I have been solving my brazilian real hedging issues with an ATR adjusted hedge basket. What I did was short USDAUD USDNZD USDCAD USDNOK in a 1.5 ratio. That is, for every 1 USD I have in an american broker, I short 1.5 USDs and buy the currencies from above I arrived at the 1.5 ratio by looking at the Average True Range of those currencies, averaging them out them comparing to the BZF(Brazilian Real ETF) ATR. 1.5 is roughly correct, that is, the real is 1.5 more volatile than those currencies. This can change in a month to month basis but for practical purposes seem to be enough The only remaining problem might be the fact that Brazil has the highest real interest rate in the world so my carry in the basket should be lower than a 100% real allocation. But I'm not even sure this is a bad thing as speculation in the country is high and if the real estate market cracks I'd expect to make the money back as the hedge basket outperforms the real even though they are ATR adjusted. In other words, reaching for yield in Brazil might be a sucker's play at this point of the cycle If someone can spot a flaw on this strategy let me know
have you looked at BRL futures? http://www.cmegroup.com/trading/fx/emerging-market/brazilian-real.html
No liquidity. It will cost a fortune to roll over the contracts. BZF hurts my buying power and cash liquidity(I'm paying interest to IB currently), I still own some but if I don't see major flaws with the ATR adjusted basket I might liquidate a lot of it
I've been thinking about that "failed" German Bund auction and I'm surprised I haven't seen any of the press covering the differences in say, German debt sales and American debt sales. As I read it, German auctions basically require real money buyers as opposed to the U.S., which are more a Fed liquidity exercise. The crap German auction could be because rates had just fallen too far too fast, and not over any worry about German paper in general. In addition, doesn't the Buba always retain some of the paper to sell at a later date? This time, obviously, they had to retain more.
That didn't last long ... legging back into AUD short after Merkel/Sarkozy presser. More of the same out of those two ...
No, not at all... Firstly, because it's flexible. Secondly, because it's based on realized inflation, which need not follow unsterilized QE.
I'd say that one of the contributing factors was also that it was a Japanese holiday. That's why you don't see the move in the cash bond yield. So I think it's worth waiting to see what happens when the domestics come in properly (officially, Japan was open today, but, due to Thanksgiving, volume was really poor). At any rate, the "end of Japan" trade is back in the headlines again, spurred by the S&P, the selloff and some flows. Also, possibly driven by the "no haven is safe" idea.
German auctions don't require real money buyers necessarily, but there's no real concept of "primary dealer", which means that, yes, some paper gets retained routinely, as part of normal operating procedure. However, this is the worst subscribed German auction on record and, furthermore, BuBa was clearly uncomfortable retaining that much, since there were reports of them hitting bids an hour or two after the auction. As to whether it was a poor auction because rates fell too far too fast or because foreign investors are uncomfortable with any EUR-denominated paper, I suspect it's the latter, given the various other news.