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My Paper Portfolio – Jan Update

Whilst my professional role is as an enabler, rather than a taker of risk, to maintain a degree of incentive compatability between me and my clients I keep and regularly update them on my ‘paper portfolio’. I record all the trades I really like that either I’ve come up with myself, or cherry picked from the best research I read from around the street. It’s pretty concentrated – with only about half a dozen ideas running at one time.

Here’s the current lowdown:

1. Long of $200k/bp 17-Mar-15 => 2’s10’s conditional bullish steepener on US rates.

Oh god I have to start with this one. I thought back in September that the US economy would start to cool, and we would see market expectations of rate rises move further out the curve. I was naive. Too long of my own ability to forecast (though I think the US economy will cool over Q1 2015!) and not cogniscent of the markets relentless appetite for long dated bonds. I am going to hold this to expiry because I still hold out hope that 2y rates can rally  a lot – and it’s kind of a hedge for the next trade. Also if they look like hiking and the curve flattens a lot I won’t get hurt because it’s conditional bullish.

– 1.97mio USD

2. Long of $50mio USDJPY 113.50 calls, conditional on US 10y rates at expiry < 2.61, expiry 16-Mar-15

And he comes storming back! I absolutely love this trade – it is probably the smartest thing I came up with this year. It’s a correlation trade. Because USDJPY and US 10y Rates were strongly correlated in the autumn, because the USD was moving higher whenever more rate hikes were expected. Because of this, adding the conditionality cheapened the USDJPY calls massively – by about 75%. USDJPY is now at 120.40, US 10y Rates are at 2.23 – victory is mine!

+ hard to value, something along the lines of 2.5mio USD

3. Dual Digi, $1mio if USDKRW > 1120 and HSCEI> 12,000 at expiry

Another correlation one – this one pays me if USDKRW rallies and the Hang Seng index goes up. I don’t love this one  – I remember being very convinced of it when I put it on in November, and I’m still bullish USD and Asian equities, but not so bullish china as I was. We’ll see

+ something? No real idea. I paid 10% for it – maybe it’s worth 20 now? Who cares. Hold to expiry

4. Long of $100k/bp 30y Gilts vs Swaps, BPSS30 ticker in BBG, entry -27, target -17.5, stop -34

There are a lot of pension and other regulatory changes coming up for the UK, specifically, it’s likely that many funds who have failed to meet their shortfalls under 5y plans proposed by regulators in 2010 will be forced to ‘de-risk’, and buy long dated government bonds. The big risk for this trade is a reflexive market panic if Labour look like winning an outright majority, but honestly, I think such a panic should be faded.

5. Long $50k/bp Dec18 Eurodollar futures vs Short Dec19, entry 16, target 50, stop 0

At the moment the Market is effectively pricing Fed policy error. They hike starting Q2/Q3 this year, manage to do 150bp or so then have to stop. I doubt this scenario immensely. I think Yellen is smart – and if the US economy starts to slow down (which given months and months of dire investment data it ought to do!) then rate hikes will be priced further and further out the curve. 16bp is super flat compared to the history, pretty much the all time lows, and it never goes negative.

Let’s see if January is kind to me! Comments and criticisms very welcome.

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