To Kill a Mocking Treasury note


It has been tough trading & positioning in interest rates in 2014. Anybody telling you otherwise is either lying or very lucky. From the chart above, you can see that U.S. 10-year Treasury note yields have moved from 3.10% to 2.55% in January; and ever since whipped around every 1 – 2 weeks between 2.55% & 2.80% very erratically … Mocking at all bulls & bears in Treasuries.

Now every lay person will say that it then presents a simple ”range trading” strategy of 2.55 – 2.80% for the supposed smart trader to monetise.  Well in real life, it might not be so simple as the prices gap back & forth and the supposed extremities occur during U.S. economic data releases in very short time frames in a blink of an eye more often than not.  As such, you will be lucky to capture at most 50% of these moves. And if you are unlucky, you get stopped out at some of these ”instant algo flash up or crash down” while still building your positions.  And we are talking about ”basis points” here … where making 10 b.p. or 0.10% is like a home run these days! Something that any lay person on the street will not really care about or bother.

During such times, perhaps it is the ”no stops”, ”no leverage” & ”no haste” real money investing approach that works best in the bond markets now.  Essentially replicating a ”long gamma” approach of ”buying low” and ”selling high” … in putting on positions at the 2.55 – 2.80% range with preparations for overshoots at times but not stopping out.

Asianmacro is short June14 10-years Treasury futures late last week (i.e. paid rates & betting on higher yields in the interim).


Scrapping the bottom-of-the-barrel for yields


It has been a profitable ride especially for Asian credit investors buying into rated and unrated high yield bonds issued by a plethora of Asian companies over the last 2 years.  Credit spreads have tightened significantly from the wides in 2008 but are still higher than the pre-2008 crisis levels.  A number of friends who have been doing well ”earning the carry” and had never sold out during the number of scares when credit spreads widened temporarily have asked me whether it’s time to exit.

I have always believed that credit trading is not trading in the real sense as it’s about getting the multi-year credit cycle correct and being lucky more often than smart. It’s also about being able to ride through a long enough period for the ‘carry’ and ‘slide’ to compensate for any ‘marked-to-market” valuation gyration loss in capital in the interim before maturity or pre-mature exit.

As such, I do not think that we will revert to the pre-2008 crisis ”Old Normal” in Asian credit spreads (*as seen in the illustration).  We are in the zone of the post-2008 crisis ”New Normal” in Asian credit spreads with perhaps another 30 b.p. tightening vis-a-vis the Credit Suisse Asian Bond Index Credit Spread Index as a reference.

But are we scrapping the bottom-of-the-barrel in this?  Just like leaving a good tip at a restaurant after an excellent meal as an appreciative diner … perhaps it will be more prudent to exit early, leaving some money on the table for others chasing yields and sleep better at night ! (*Although it is not an Asian practice to leave tips in restaurants … perhaps it might prove to be penny wise, pound foolish for those who insist in staying till the very end)