<< Spreading the Bund >> (please read!)

Discussion in 'Index Futures' started by s0mmi, May 1, 2013.

  1. s0mmi


    Hi guys

    I was wondering if any fellow experienced Futures traders can help me. I've been a consistently profitable trader at a prop shop for 2 years now, and I am looking to get a little more involved with the Bund and European session.

    Now, as far as it goes, at my prop shop, every single experienced trader I talk to says "do not trade the bund. get away from it."

    I don't want to just give up on it. I have no interest in trading it outright, though (I think thats impossible for me living across continents with laggy speed). I don't live in Europe or the U.S.A so I was wondering what are decent spreads with the Bund and what is some basic rationale you guys use with it?

    Something I experimented with:
    - I recently tried spreading the French 10-year bonds with the German 10-year Bund. It was hell.
    -It's 10 euro a tick on a 1-lot and the spread blew 55 ticks on the first night I traded it! 5.5 basis points! How the f*ck can Government risk change THAT MUCH in a single session! Holy moly. They have the same f*cking interest rates and currency.
    -It was disastrous. And I realised that the risk/reward on that thing is blown out hard for a day-trader and single session mentality. Even two-session mentality isn't enough.
    -And what is the f*cking rationale? There was NO relative value with the CAC40 versus the DAX up/down values, or the Euro being a risk on or risk off tool. It was just random bullsh*t.

    It took 1500 Euros from me and I averaged SLOWLY. There was no rationale. The French PMI was BETTER and they bought it up. The german PMI was WORSE and they sold the Bund! Hell. Pure Hell. So I learned my lesson, the French bonds with the Bund is a dirty, dirty spread and you need to find something you believe in that works.

    I was wondering if anyone out there knows what prop shop spreaders like to do with-in the European or U.S. region? Generally I want to keep legging risk to a minimum, though I know it's not always a guarantee.

    I would specifically like to invite anyones thoughts on spreading 10-year Government Bonds (U.S. Tnote and German Bund alike). Also I would like to ask:

    1. Has anyone traded the Swiss 10-year Bonds? {Their yield is 0.23% and it hardly moves so you might need like a 3:1 ratio with the Bund)

    2. Has anyone traded the British 10-year Gilt Bonds? Spread them with the Bund? Or T-notes? Thoughts?

    3. What about any other spreads? How is the consistency with Italian 10-year BTP Bond and the Bund or something else?

    Basically if anyone has any thoughts or information they could share it would be great. I have already experimented and tried, and my general conclusion is that the Bund is a f*cking piece of sh*t and to avoid it at all times whenever possible. Trade anything else you can instead. But I am hoping my conclusion is wrong!

    I was also wondering if there's any logical rationale to some basic spread strategies as well. For example, if you're trading the Australian 10-year bonds and hedging them with the U.S. T-notes, if the S&P500 rallies you quite often see the Aussie 10-years selling off pre-emptively more than the U.S. T-notes. And there's the Aussie dollar currency factor as well (if it drops by 20-30 ticks you'll see them go bid and it try to move up half a basis point)/

    So for anyone who does trade a spread, can you please share what you look at/don't look at? Equity & Currency correlation? Price action? Other local yield curves?

    Thanks for anyones help.
  2. bone

    bone ET Sponsor

    I would suggest that your propensity for cross country spreading might be the first place for careful reflection. I personally wouldn't... The correlations are very inconsistent and tend to break down dramatically and without warning. The Notionale versus the Bund used to be a great trade 15 years ago; hell, so was the Bund versus the US Tens twelve years ago or so. No way no how these days. My advice would be to look strictly intermarket in terms of the rates. Honestly.
  3. s0mmi


    Thanks for your honest assessment.

    I'll start to consider local-hedging and trading the yield curve of various countries.

    I'm guessing the French yield curve & British yield curve are much less competitive than the Bunds bund/bobl/schatz?
  4. ixus


    With respect; were you paying attention to the news flow that day? It matters.

    Was this around the time of Japanese monetary policy changes? Massive move into European yield on that. FOATS went below US 10yr for a period!

    Yields moved dramatically around Italian elections.

    Yields moved dramatically on Neg Rates comments at ECB conf.

    Your Swiss 10yr will be subject to Neg Rates and FX.

    French can move with the Bund or Periphery Yields depending on market sentiment.

    If you're just trading off correlations etc you're in for a rough ride.
  5. s0mmi


    Thankyou for the time to post!

    And yes, I did pay attention to all of those. In fact, the day I traded it was the release of all the PMI's. There was no talk of the JGB's or interest-rate ECB movements.

    On the day I traded it, the PMI for France came out GOOD and the CAC40 led the european equities with >1% rally.

    The PMI for Germany came out BAD and the Dax was the weakest on the night.

    Unfortunately, even the equity and news flow correlation meant nothing because they bought the French 10yrs through the high.

    I do expect these things to happen dont get me wrong. But I was simply analyzing risk/reward. The spread rarely enables exit and re-entry without heaps of bund legging (now who wants to risk that all the time?) and it really gave me a feeling that I was just outright Bund.

    I am going to take some advice in this thread and perhaps start to look at local hedges instead. Maybe 5yr-10yr spreads of the same countrys' bonds instead of intercountry. The correlations do go in and out and I guess its really unreliable due to the heavy amount of algorithms and low volume in the past 18 months

    If theres any other help or criticism you can offer please share. Im also looking for advice on trading local curves! Thanks
  6. Good trade story, I must admit I did get burned by the same Bund - OAT trade right after the JCB started their crazy QE.

    to ixus,

    the news were not out yet, or easing news were, but the link "QE in Japan - crazy demand for long end everywhere" was not that clear the following day or two. Only after two days the massive flattening due to crazy demand of 10s everywhere the story about flows to long-end started to get headlines and the explanation hit the news. I'm a prop trader as well, and I dare say that I follow the news pretty intensively, and can grab the meaning of most of what I hear, but in this case the effect of the Japanese QE (which is now from hindsight self-evident) wasn't the first trade in my mind.

    SoMMI, I'm posting a private message