Every month I update you lucky lot on the progress of my paper portfolio – which is how I keep track of my market views and ideas! It’s designed to mimic the kinds of trades my clients do, and indeed, many of my clients trades are replicated below. Very much welcome your comments and feedback as I seek fixed income enlightenment! A quick word on performance. Since the ‘start of trading’ in June 2014, I have ‘banked’ $2mio (The PnL of my closed trades). I had one enormously damaging trade that cost me $4mio and wiped out the gains of several other successful trades, a good lesson in risk management.
March was a relatively calm period for the paper portfolio. Notably, I closed my blues golds steepening trade for a 3.5bp profit because I want to find a way to play steepening of the curve with a lot more explosive potential. I can reveal the identity of my mystery short spain trade as I didn’t really get anyone into it in meaningful size, and it hasn’t worked anyway, though it sure as hell hasn’t cost you anything!
In Europe, with everyone focussed on QE, I am choosing to bet against duration and in favour of credit. Previous experiences of QE have taught us that the anticipation of monetary policy loosening does wonders for duration, but the implementation does not. Investors are loathe to add duration at low yield levels, preferring to extend in the credit complex. My latest trade, being long of 10’s30’s in EUR swaps is therefore at variance with a lot of market participants who believe that the duration party continues.
*NB: I forgot a lot of initiation dates and option expiries – I’ll amend tomorrow when I remember to send them home from work!
1. Dual Digi, $1mio if USDKRW > 1120 and HSCEI > 12000 at expiry, 30-Mar-15, + $???
Not gonna spend much time on this one. Who knows, maybe I’ll get lucky – very close to my strikes, not hedging it, definitely should have unwound it by now if I’m honest. Unfortunately, I have no way to value it. Such is life! Let’s see if I get there! If I can find someone to price this for me before month end I’ll unwind it, as pretty close on both strikes and can probably at least double my teeny 100k premium spend!
2. Long of $100k/bp 30y Gilts vs Swaps, BPSS30 ticker in BBG, entry -27, target -17.5, stop -34, -$500,000
I no longer really believe in this one. Having spoken to a lot of people about it I know think Pension Funds are too keen to keep their powder dry to actually take the plunge and buy 30y paper at these low yields. They need cash for potential redemptions given the de-regulation we’ve had, and don’t want to lock it up – if they do want participation in lower rates, they’re much more likely to receive swaps, which pushes this against me. If I get a chance I’ll unwind on a pop higher. Don’t like it any more, but no rush to unwind as there’s limited scope for this to gap through my stop and really hurt me too much.
3. Sell EUR 100mio 1y7y 0.85% payers, buy 100mio 1y7y 0.435% receivers, +$25k
This guy is chugging along gently earning carry as the top strike rolls further and further away! TBH this is a bit of a dud – there’s just no juice in the 7y point. I might spend the pennies at some point to buy back the payer.
4. Long Bond option: 100mio 19-Mar-15 => BTP 08/19 struck at 103.20, for 82cts fwd premium, +$600k
Looks like this leg of the rally finally takes me into positive PnL territory on this guy. I never did get a chance to add as there was never any QE disappointment related sell off, so i kept my relatively small position size and will not make all that much on this.
5. Buy 50mio x IBEX 10,600 / 10,000 Put spread vs Sell 2.5 x SPGB 10/24 107.85 Puts, Exp: 05-Aug-15
Not going to mark this one to market. Basically, the idea is to sell puts on spain where the ECB can always step in as buyer as last resort, and buy them on IBEX. The risk premium on bond options is really high, so you can effectively use it to fund some options on a product (IBEX) where the premium is low and monetise that – although I’m not sophisticated enough to actually monetise it by trading the gamma! Either way it’s a nice greek hedge as Spain will be most affected by further greek troubles, given the fears around Podemos.
6. Buy 1 x 2 Payer spread in JPY, 6m => 10y , 0.6 / 0.81, +$175k
A smart person based in HK told me that the Japanese Megabanks target to buy another huge slug of JGB’s is 80bp. Therefore, that makes a great top strike for a costless 1 x 2 call spread! The skew and vols were rich enough to get what I thought was a pretty kickass breakeven range. 1% is a pretty ambitious level for JPY rates given EZ QE!
7. Buy £100m 3m => 10y Receiver Ladder, strikes: 1.80 / 1.65 / 1.52 +$90k
UK Election vol is overpriced and it’s not really a rates story anyway. Therefore, happy to sell skew and vol and extreme outcomes and pick up these pennies whilst everyone is worried about the steamroller on the horizon.
8. EUR Pay 10’s30’s 30k @ 49.5, 30k @ 45, target 70, stop 34. +$60k
I believe that QE is much more positive a story for Credit than duration in the euro zone, and 10’s30’s at 40 is not a tenable position for it to be when the EZ seems determined to do a Switzerland on the curve and force it to bizarre, non economic levels. There is just no reason for any RM counterparty to buy 30y paper here and lock in such low yields, they are going to try and replicate the yield/duration characteristics of their French and German paper by buying credit and periphery. The process of QE being priced flattened 10’s30’s massively, from 80 to 50bp. I look for a large part of this to retrace as the reality of QE sets in. I paid a clip @ 49.5 and one at 45. I was going to add another at 40 but it never got there – and now I will hold and see.