Shorting 2 year german bond

Discussion in 'Financial Futures' started by kashirin, Jun 7, 2019.

  1. question to bond traders
    current rate -0.67%

    if I sell 1000 bond outright I understand margin is 60 euro b
    and for bond held for maturity I understand the return is guaranteed 6.7 euro
    so basically more than 10% guaranteed

    did I miss something? why not everybody in this trade then yet?
    I'm not sure how I can apply it to futures
    Last edited: Jun 7, 2019
  2. bone

    bone ET Sponsor

    Holding on-the-run Schatz is not going to “guarantee you a 10% or greater return”. Your understanding is not correct.
  3. zdreg


    Please explain.
  4. bone

    bone ET Sponsor

    Tell me how a negative yield two year duration instrument “would guarantee more than a 10% return” as proffered by the OP.

    The OP is correct that the Schatz yield is at present -0.67%. It’s been as low as -0.95%. So yes, many many investors have for some time been betting on the prospect of EU stimulus. And as we all know as yields become more positive price goes down. And OP is indeed talking about shorting the Schatz - but his clean price cash flows don’t add up.

    I should think that every institutional investor on Planet Earth would be jacked to the tits to find two year paper issued by the Bundesbank that “guaranteed a 5+% annualized return” - especially when you are paying the Bundesbank coupon payments to hold it. Now the Bundesbank won’t sell you negative interest rate paper so you purchased it on the secondary market and you’re paying the Ionia repo rate to finance your purchase. So you’ve got two negative cash flows to consider when you calculate the clean price.

    2 Year Note Yield in Germany averaged 0.20 percent from 2008 until 2019, reaching an all time high of 4.14 percent in August of 2008 and a record low of -0.95 percent in February of 2017.
    Last edited: Jun 8, 2019
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  5. zdreg


    This is an answer you should have given in the first place, An answer to the OP like your "understanding is not correct" was inadequate.
  6. bone

    bone ET Sponsor

    Feel free to explain the Sovereign Debt rabbit-hole to the uninitiated in three concise paragraphs yourself next time.
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  7. bone

    bone ET Sponsor

    Check / as of Friday’s close the Schatz yield is now at -0.69%. Shorting the Schatz at -0.67% would have put you in the hole by 20 Euro per 100,000 Euro notional value. Shorting Sovereign Debt is not a risk free endeavor. We are still 260 Euro per 100,000 Euro notional away from the low of -0.95%.

    So, if OP was short 1,000 Schatz as he proposed would be marking (20,000 Euro) in the one trading day since his post.
    Last edited: Jun 8, 2019
  8. bone

    bone ET Sponsor

    A two year piece of paper that guarantees >= 10% return over two year maturity is high risk / low credit rating borderline corporate junk status . And there are no guarantees in junk corporate bonds (or Greek or Russian Sovereign paper for that matter).

    The dirty price of the futures contract is “dirty” because of the various coupons attached to both on-the-run and off-the-run cash notes deliverable into the Eurex futures contract.

    Smarter money would be allocated towards a yield curve spread trade: like the Schatz versus the Bobl or Schatz versus Bund for example.
    Last edited: Jun 8, 2019
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  9. While I like your logic and appreciate your fixed income knowledge I think what OP was trying to get at is that if he shorted the bond and bought it back at maturity he would have realized the current absolute value of the yield to maturity but he ignores that he has to pay much higher financing charges for the margin loan which surely exceeds 1% if not much more for a Euro margin loan with any retail broker.

    bone likes this.
  10. bone

    bone ET Sponsor

    Next to impossible for someone outside the Dealer/Bank network to find on-the-run Bundesbank debt to short. Hell, for decades they wouldn’t let US Hedge Fund desks trade it in fact (Ken Griffin at Citadel made a big stink about it)

    The play would have been to buy Eurex Schatz Contracts before and now look for a suitable level to short. Smart money is spreading yield curve.
    #10     Jun 8, 2019
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