Can someone explain?

dribs · Aug 13, 2011, 12:57am

Hey,

I need some things answered if I can, thought this was the closest relevant section to put it in. Okay, I have some questions about the lingo and what things actually mean, been reading stuff on global macro hedge funds. There seems to be a lot about being short or long "volatility". What does this mean? I am trying to get my head around what things mean, like how does one long or short volatility?

Next thing is yield curve trades, I kind of understand the yield curve thing, I think. But can someone explain it in basic terms of putting on a trade for it? Like if I think the curve is going to steepen or flatten, what would that mean? Going long or short the 30yr?

Next is spreads, I understand there are spreads in the same contract, like the STIRs how you can trade the months in the future(what is this called? forward months?) but I mean spreads like in this book I am reading it says about all kinds of different spreads, like one is "Corporate and Emerging Market Spreads" with the X axis as "Basis Point Spread to Treasuries", what do these spreads mean and how does one actually place a trade on something like that? Is there a platform somewhere that has all this random stuff on it or something? When people talk about spreads, are they nearly always linked to the Treasuries? Things in this book like "I'd be short corporate spreads, they'll blow out". What does this mean and what would the trade be?

Another bit in the book says "Another one was the Japanese yield curve, which again we started trading around 1999 or 2000 when you could do 5 year, 5 year forward against a 20 year, 10 year forward steepener".....wtf? What does that mean?(the underlined part). Also the same guys are talking about a TIPS trade, they bought TIPS(Treasury Inflation-Protected Securities) yielding 3.4% and got out @ 1.5% in 2003, now this just means they went long on TIPS and because price and yields are opposite, the trade was a huge winner as they got out at 1.5% yield. Correct? First, why do traders/fund managers/everyone talk in terms of yield when it comes to this, on every platform I see, bonds are shown in prices, not yields, so why does everyone refer to yields? And two, how would one actually put this trade on? Start buying TIPS, how do you do that? Is there some exclusive access that hedge funds have somewhere because I have never seen TIPS anywhere other than in books and see people talking about them.

Also, what is the thinking and ideas behind these trades? As in, what do they actually mean, I hear Bloomberg and sqwawk guys going on about spreads and yields "blowing out", like Portugese or Spain or something, wherever it may be, what does that mean? For the country and for the markets and how does one place a trade to use that to his effect? What would he have to place a trade on? Does a higher yield mean that country is more risky than it was before with lower yields, therefore their bonds would be going down if yields blew out? Which would.....widen the spread to US Treasuries?

I'm sure I have more questions but can't think of anything extra just yet, I know there is a lot there but anyone that knows, please let me know because it bugs the hell out of me, I read/hear about this kinda thing all the time but don't really know what it all means and how one benefits from it. Sure I can read about it in books and in textbooks(which I am doing, but it takes forever because of all the puffed up fancy words), but I want to know how it works in the real world and what traders do and how they actually put the trade on with weird things like this(weird to me, never seen TIPS or Portugese spreads on Interactive Brokers platform or TT or anything) and what it ACTUALLY means when these things happen(yields blowing out, spreads etc etc.).

I want/need to expand myself, trading for me is scalping the Bund in trades that last a few seconds to minutes, so whether I should or shouldn't, I don't really know what all these things mean, so any help is very much appreciated.

Martinghoul · Aug 13, 2011, 7:14am

Jeez, mate... Lots of questions. They're simple questions, but you have to be more specific. Can you just put up a list, so that I can respond item by item?

dribs · Aug 13, 2011, 9:28am

Quote:

Originally Posted by Martinghoul

Jeez, mate... Lots of questions. They're simple questions, but you have to be more specific. Can you just put up a list, so that I can respond item by item?

Haha yeah I know, sorry. Thought I might as well post it all as one rather than have 5 million different posts asking different questions.

How do you mean more specific? I'm not sure how to describe it in more detail because I don't know what it all is, I'll try.

Ok here is a list. Might be a bit jumbled but I'll try.

1. What are they referring to when they speak of volatility, as in trading it, going long or short volatility? And how does one do it.

2. Can you explain a yield curve trade in basic form and also how you would put it on? I read about people thinking the curve is going to steepen or flatten, does this mean going long or short the 30yr or what?

3. How do traders determine where a yield curve SHOULD be at? Like in the book some guys referred to the 30yr TIPS trade, because they went long when it was yielding 3.4% and got out at 1.5%, but they were saying how the TIPS shouldn't have been at 3.4%, how would they come to this conclusion?

4. Spreads. For example - "I'd be short corporate spreads, they'll blow out" means what? First of all, what are corperate spreads and what does it mean when he says they will blow out, rise? Is everything related to the USTs? All these different spreads.

5. What does it mean for a country/economy/market when I hear about yields or spreads blowing out, like sometimes on a sqwawk I hear him say something like "Portugese spreads widening" or something similar to that, can't remember exactly what he says, but what does this actually mean and how does one trade that? Like does that mean the country is more risky if its yields or spreads are blowing out? Traders rush in or short bonds or? Are "portugese spreads" or Italian spreads an instrument that you can choose on your platform or something? I've never seen it on TT or anything, I know I'm probably sounding stupid but I want to make sure I understand it clearly.

6. What does " 5 year, 5 year forward against a 20 year, 10 year forward steepener" mean? Again, how would one put a trade like this on?

7. Back on TIPS, what is it and how does one put a trade on it? Actually most of these sorts of things, EURIBOR, LIBOR etc. Are these rates that traders just check each day or do they actually trade them? And why? What do they mean if it rises or falls? Where can I find it, again, I have never seen a TIPS or EURIBOR or LIBOR ticker on any platforms or anything.

8. Why do people refer to bonds in yields and not prices when they are all quoted in prices from what I have seen?

9. What are the main things traders/macro guys look at as far as spreads/yields/bonds, whatever in whichever country, are there a certain few that are most important or is it just about where the money is flowing and where the most opportunity is?

10. Can you explain a scenario in the markets, say...if there was a terrorist attack, what would happen to spreads and yields, equities would plunge and bonds would rise, therefore yields would drop? So what would happen to spreads, a spread is obviously the difference between two instruments, but can it be any instruments, or are most foreign country yields all related to the USTs?

Basically, I'm just trying to get an idea of how traders actually trade these things, I only ever read about them or hear about them, but have no idea about what they actually mean or do, let alone how to actually trade them, or where to even look at them? Do you need to get the Bloomberg Terminal or something to gain access?

Hopefully that's a little easier, some questions might be the same answers or very similar at least, I wouldn't know so if they are, feel free to answer them together. Sorry for writing so much!

Martinghoul · Aug 13, 2011, 11:16am

1. There's a variety of products (derivatives) in a variety of asset classes that allow you to trade volatility. These range from vanilla options (not a pure volatility bet) to variance swaps to VIX futures etc. Simplistically, when you buy an option you're long volatility and when you sell, you're short. Volatility is a very very big subject and there's a lot of stuff that can be said and discussed about it. You'll need a thread for it alone.

2. A yield curve spread trade is one where you buy/sell a shorter-maturity bond vs selling/buying a duration-weighted amount of a longer-maturity bond. When you're short the longer-dated bond, the position is known as a steepener (performs when the yield curve steepens, i.e. longer-dated yields rise more than shorter-dated ones); otherwise, it's a flattener.

3. A very loaded question. There's a whole variety of ways one can model the shape of the yield curve and a lot of factors determine that shape. So different people would rely on different techniques. Most traders who bet on the outright level of yields (such as in your example) base their conclusions on macroeconomic analysis and forecasting.

4. When people talk about corps, they normally use USTs as sort of a baseline. So you're correct and all other bonds trade as a yield spread to USTs. To get the yield for a corp bond, you would add the "spread" to the yield of the corresponding maturity UST. Spread blowing out means that the corp bond yield is rising relative to the UST yield.

5. It's the same for countries, more or less. For most European sovereigns the most important metric is currently the yield spread of that sovereign's bonds to German sovereign bonds. So in that case as well, "spread widening" means yields are rising, which can be interpreted as the mkt perceiving the country's sovereign risk rising. To actually trade the spread you would buy/sell a Portuguese bond vs selling/buying a German bond (or bond futures, where available).

6. These trades are mostly done in the world of interest rate swaps (although you can do it bonds as well). For example, 5y 5y forward is a 5y swap that starts in 5 years. So 5y 5y fwd vs 20y 10y fwd steepener means that you go long (receive fixed) on a 5y swap that starts in 5y vs going short (pay fixed) on a 20y swap that starts in 10y.

7. TIPS stands for "Treasury Inflation-Protected Security". It's an inflation-linked bond, i.e. a bond whose cashflows vary with inflation. You can buy and sell a TIPS just like you could any bond. As to EURIBOR and LIBOR, those are money mkt rates (specifically, rates on unsecured deposits traded in the London interbank mkt). People do trade these very actively, because these rates rising and falling affect a lot of things in the economy. As to tickers in platforms, you need to look more carefully or maybe the platforms you have checked don't offer these products.

8. Basically, because a bond price depends on the bond's coupon and has some other not so handy features, while yield doesn't (more or less). So yield is a single measure that captures everything you need to know about a bond. Obviously, bond trade settlement is based on price. Moreover, if you're talking about a specific bond in a specific context then its price is occasionally used. At any rate, it's not really correct to say that bonds are quoted in price. In reality, they're quoted in either price or yield and/or both.

9. I am not sure what you mean. Macro punters look at the overall macroeconomic environment, so all sorts of data releases etc. Obviously, "where the money is flowing and where the most opportunity is" is what it's all about, but how are you supposed to know that?

10. It's really not accurate to talk about "spreads" outside of a specific context. You'll soon get very very confused because lots of completely different things are referred to as "spreads". So you need to focus on a specific asset class/mkt, where a "spread" is likely to describe something everyone understands. For example, in the US rates mkt, when people talk about spreads, they're normally referring to swapspreads, i.e. the spread between interest swap rates and UST yields.

If you want to know what these things generally are, there's a lot of books on the various subjects that you have touched on. In terms of access, yes, some of these mkts are only accessible by institutional types of accounts. Bloomberg does allow you to see prices in these mkts, but doesn't necessarily give you access.

Anyways, hope it helps and I am sure you're likely to have more questions, since you have covered a lot of very varied ground.

dribs · Aug 13, 2011, 12:34pm

Have asked more questions in bold. I know I'm going to sound incredibly stupid to some, but I don't care, I need/want to figure it all out and I might as well just ask, so bear with me

Quote:

Originally Posted by Martinghoul

1. There's a variety of products (derivatives) in a variety of asset classes that allow you to trade volatility. These range from vanilla options (not a pure volatility bet) to variance swaps to VIX futures etc. Simplistically, when you buy an option you're long volatility and when you sell, you're short. Volatility is a very very big subject and there's a lot of stuff that can be said and discussed about it. You'll need a thread for it alone. Ok, so would going long or short VIX futs be the thing as vanilla options, so if you're long the VIX you're long volatility?

2. A yield curve spread trade is one where you buy/sell a shorter-maturity bond vs selling/buying a duration-weighted amount of a longer-maturity bond. When you're short the longer-dated bond, the position is known as a steepener (performs when the yield curve steepens, i.e. longer-dated yields rise more than shorter-dated ones); otherwise, it's a flattener. Ok great thanks, that's along the lines of what I was thinking.

3. A very loaded question. There's a whole variety of ways one can model the shape of the yield curve and a lot of factors determine that shape. So different people would rely on different techniques. Most traders who bet on the outright level of yields (such as in your example) base their conclusions on macroeconomic analysis and forecasting. Ok so it's more up to the individual, not a commonplace where people go to check what the curve should be like.

4. When people talk about corps, they normally use USTs as sort of a baseline. So you're correct and all other bonds trade as a yield spread to USTs. To get the yield for a corp bond, you would add the "spread" to the yield of the corresponding maturity UST. Spread blowing out means that the corp bond yield is rising relative to the UST yield. Ok hang on, first of all what is a corporate bond? from a company? So other country's yield spreads are all referring to USTs most of the time? And by "USTs" you're referring to what exactly, I know its US Treasuries, but are we talking about the futures here? Like the ZN, ZB etc. contracts? Is that what people are referring to? I need it explained as basic as possible

5. It's the same for countries, more or less. For most European sovereigns the most important metric is currently the yield spread of that sovereign's bonds to German sovereign bonds. So in that case as well, "spread widening" means yields are rising, which can be interpreted as the mkt perceiving the country's sovereign risk rising. To actually trade the spread you would buy/sell a Portuguese bond vs selling/buying a German bond (or bond futures, where available). Okay, how do I know what the yield spreads are referring to, like why the German bonds? Okay so the countrys sovereign risk rising is a bad thing I take it? Who would that impact, everyone(US,UK etc)? Or just those countries involved?

6. These trades are mostly done in the world of interest rate swaps (although you can do it bonds as well). For example, 5y 5y forward is a 5y swap that starts in 5 years. So 5y 5y fwd vs 20y 10y fwd steepener means that you go long (receive fixed) on a 5y swap that starts in 5y vs going short (pay fixed) on a 20y swap that starts in 10y. Ok this one confuses me a bit, first of all, what is an interest rate swap? Sounds confusing, what do you mean "recieve fixed" and "pay fixed"? Forgive my stupidness, but why would someone do trades like this? Why not just do simpler trades, like directional trades on futures, maybe its not as complicated as it sounds and I just don't understand it fully yet.

7. TIPS stands for "Treasury Inflation-Protected Security". It's an inflation-linked bond, i.e. a bond whose cashflows vary with inflation. You can buy and sell a TIPS just like you could any bond. As to EURIBOR and LIBOR, those are money mkt rates (specifically, rates on unsecured deposits traded in the London interbank mkt). People do trade these very actively, because these rates rising and falling affect a lot of things in the economy. As to tickers in platforms, you need to look more carefully or maybe the platforms you have checked don't offer these products. Hmm ok, a little confused here too, so these are tradeable just like ZN or ZB or Bund, Bobl or Schatz futures? I think I need to read up on what the "money mkt" is and more about the whole interbank thing, I don't really understand that or what its for.

8. Basically, because a bond price depends on the bond's coupon and has some other not so handy features, while yield doesn't (more or less). So yield is a single measure that captures everything you need to know about a bond. Obviously, bond trade settlement is based on price. Moreover, if you're talking about a specific bond in a specific context then its price is occasionally used. At any rate, it's not really correct to say that bonds are quoted in price. In reality, they're quoted in either price or yield and/or both. OK I see, how does one work out the yield from the price? So for example if I trade the Bund futures and its showing the prices obviously, then I hear some guy say its approaching X% yield, never been there before, how do I know what price that is? Is it 100 minus the yield or some calculation traders do mega quickly to determine what price level that is?

9. I am not sure what you mean. Macro punters look at the overall macroeconomic environment, so all sorts of data releases etc. Obviously, "where the money is flowing and where the most opportunity is" is what it's all about, but how are you supposed to know that? Yeah its a bit of a hard question, I guess I mean are there any main ones(if any) that most people look at to determine how things are going in the mkt, like if things were all going smoothly and suddenly some certain yield spreads blew out, that this is a sign of a coming sell of or something in equities? Ah its not really an answerable question I guess, reading it as I type, maybe forget this one, seems like its more up to the individual and gathering ideas/looking at releases etc.

10. It's really not accurate to talk about "spreads" outside of a specific context. You'll soon get very very confused because lots of completely different things are referred to as "spreads". So you need to focus on a specific asset class/mkt, where a "spread" is likely to describe something everyone understands. For example, in the US rates mkt, when people talk about spreads, they're normally referring to swapspreads, i.e. the spread between interest swap rates and UST yields. OK, I trade/sim futures, never traded options, mostly in the Bund futures, scalping for a few seconds to minutes here and there, so what spreads would one look at in that situation, if any on such a time frame? What spreads would effect those instruments? Or the US 10yr and 30yr futures. I'm just trying to get a more broad perspective on the effects of different things on the markets, how a trader approaches it, rather than an authors viewpoint on it.

If you want to know what these things generally are, there's a lot of books on the various subjects that you have touched on. In terms of access, yes, some of these mkts are only accessible by institutional types of accounts. Bloomberg does allow you to see prices in these mkts, but doesn't necessarily give you access.

Anyways, hope it helps and I am sure you're likely to have more questions, since you have covered a lot of very varied ground.

Yeah if you know of any good books then let me know, I have a few books on bonds, but they are all the same, they go into so much detail and I just get muddled and confused, all the different formulas for everything, does a trader really need to know that much detail? I mean obviously you need to know about your market and what it is but, I need a book that is from a traders perspective on these sort of things, like the global macro hedge fund interviews were probably more helpful than the bond/text book style books I have, because its in a real sense, a practical type way, so okay these yield spreads did this, so we got into this position as a result because X should happen, how its all linked and what it actually means for the market and economy when some spread or yields blow out or some corp yield does X or italian yield spreads go into unchartered territory, is it going to make equities sell off hard or commodities blow through the roof or currencies to go nuts or bond futures to do something or what?

I'm not all that interested in what the formula is on how they establish some minor detail in the building of a bond, that doesn't help me, just confuses me. Like surely I'm not going to hear something over the sqwawk and think "Oh yeah.....I remember what that is, that is calculated by going X = c + 2m-2m39-xm93=( x0-(2)x))-s=%9L". I'm just going to want to go right....that yield/spread/whatever has done X, so I will long or short X because it means Y. Doesn't that make sense? I don't know if thats stupid of me or not. If you know of any books that explain it in simple terms from a practical standpoint, please let me know

Thanks heaps for your answers too, much appreciated!

Martinghoul · Aug 14, 2011, 6:11pm

Quote:

Originally Posted by dribs

Yeah if you know of any good books then let me know, I have a few books on bonds, but they are all the same, they go into so much detail and I just get muddled and confused, all the different formulas for everything, does a trader really need to know that much detail? I mean obviously you need to know about your market and what it is but, I need a book that is from a traders perspective on these sort of things, like the global macro hedge fund interviews were probably more helpful than the bond/text book style books I have, because its in a real sense, a practical type way, so okay these yield spreads did this, so we got into this position as a result because X should happen, how its all linked and what it actually means for the market and economy when some spread or yields blow out or some corp yield does X or italian yield spreads go into unchartered territory, is it going to make equities sell off hard or commodities blow through the roof or currencies to go nuts or bond futures to do something or what?

I'm not all that interested in what the formula is on how they establish some minor detail in the building of a bond, that doesn't help me, just confuses me. Like surely I'm not going to hear something over the sqwawk and think "Oh yeah.....I remember what that is, that is calculated by going X = c + 2m-2m39-xm93=( x0-(2)x))-s=%9L". I'm just going to want to go right....that yield/spread/whatever has done X, so I will long or short X because it means Y. Doesn't that make sense? I don't know if thats stupid of me or not. If you know of any books that explain it in simple terms from a practical standpoint, please let me know

Thanks heaps for your answers too, much appreciated!

Right, first let me say that I strongly disapprove of shortcuts that you describe. For me the ONLY way to do anything is to understand it from the bottom up. You don't qualify to be a macro punter until you understand every detail of the thing you're punting. This is one of my most fundamental beliefs and I would discourage you from doing anything quick and dirty, in the strongest possible manner. I could properly wax poetic about this, which is one of my most important guiding principles. I have seen too many "legends" blow up on little things that they neglected to understand properly. The reason is that there's absolutely nothing in the mkts that follows pre-defined rules. Correlations change, liquidity rises and falls, models break down, etc. The only way you can navigate all this is with thorough understanding, which can only be obtained through hard work and experience (and you'll never achieve perfect understanding, as things in the mkt always evolve and change). So I would suggest you stop looking for shortcuts and work on all these confusing details and formulas, because only if you understand them will you be able to do the whole macro stuff.

All that said, my normal recommendations are these two:
"Fixed Income Securities" by Tuckman
"Understanding the Yield Curve" series of papers by Antti Ilmanen

Martinghoul · Aug 14, 2011, 6:31pm

Right, now as to the points above:
1. Yes, generally speaking, being long VIX is a long volatility position. It's a different position to the one you get when you're long a vanilla option (it's sort of a proxy to a portfolio of options), but in terms of volatility it's similar.

3. The curve can look any way it pleases and there's no rule about what it can and cannot do. If the "right" shape were given somewhere, what would be the point of trading?

4. A corporate bond is a bond that's issued by a private company. The baseline for other countries' yield spreads depends on which countries they are. If it's a European country, it's unlikely people would talk about its bond spread to USTs. When I say "USTs" I mean actual cash bonds. ZN, ZB etc are bond futures, i.e. derivatives, whose underlying are cash USTs.

5. You don't know, so you need the context and, if it's still not clear, make sure you check. Germany is commonly used as a "baseline" for European sovereigns, because it's perceived to be a "healthiest" sovereign in the Eurozone. Perceptions of sovereign risk rising is a bad thing and it affects the particular country in question.

6. And interest rate swap is a very common derivative that is used a lot in the fixed income mkt. It's a LIBOR derivative, so it's different to bond futures (ZB, ZN, etc), which is what makes it useful. It's a large and liquid mkt, which is why people trade it alongside the other mkts, such as bonds. As to how interest rate swaps are traded, that's probably for another thread.

7. Well, TIPS are directly tradable, whereas LIBOR/Euribor rates aren't (not practically anyway). You can trade derivatives on LIBOR/Euribor and yes, you do need to read things.

8. Getting a price from a yield (and vice versa) for a cash bond is a simple exercise. Doing the same for a bond futures contract is slightly more tricky and you need to know how bond futures contracts (such as Bund and Schatz) are actually defined. Do you know?

9. You're right... Very hard to come up with hard and fast rules (see my post above). The mkt moves in mysterious ways and you have to come up with your own analyses and conclusions all the time.

10. I suppose the current spreads that make all the difference to bund/bobl/schatz are the yield spreads between Italian and German govt bonds. At the moment that's the number that counts.

Jason101 · Aug 14, 2011, 7:23pm

Martinghoul - What a nice and giving chap.

Aug 13, 2011, 12:57am	#1
dribs Junior Member Member Since Oct 2010 25 Posts	Can someone explain? Hey, I need some things answered if I can, thought this was the closest relevant section to put it in. Okay, I have some questions about the lingo and what things actually mean, been reading stuff on global macro hedge funds. There seems to be a lot about being short or long "volatility". What does this mean? I am trying to get my head around what things mean, like how does one long or short volatility? Next thing is yield curve trades, I kind of understand the yield curve thing, I think. But can someone explain it in basic terms of putting on a trade for it? Like if I think the curve is going to steepen or flatten, what would that mean? Going long or short the 30yr? Next is spreads, I understand there are spreads in the same contract, like the STIRs how you can trade the months in the future(what is this called? forward months?) but I mean spreads like in this book I am reading it says about all kinds of different spreads, like one is "Corporate and Emerging Market Spreads" with the X axis as "Basis Point Spread to Treasuries", what do these spreads mean and how does one actually place a trade on something like that? Is there a platform somewhere that has all this random stuff on it or something? When people talk about spreads, are they nearly always linked to the Treasuries? Things in this book like "I'd be short corporate spreads, they'll blow out". What does this mean and what would the trade be? Another bit in the book says "Another one was the Japanese yield curve, which again we started trading around 1999 or 2000 when you could do 5 year, 5 year forward against a 20 year, 10 year forward steepener".....wtf? What does that mean?(the underlined part). Also the same guys are talking about a TIPS trade, they bought TIPS(Treasury Inflation-Protected Securities) yielding 3.4% and got out @ 1.5% in 2003, now this just means they went long on TIPS and because price and yields are opposite, the trade was a huge winner as they got out at 1.5% yield. Correct? First, why do traders/fund managers/everyone talk in terms of yield when it comes to this, on every platform I see, bonds are shown in prices, not yields, so why does everyone refer to yields? And two, how would one actually put this trade on? Start buying TIPS, how do you do that? Is there some exclusive access that hedge funds have somewhere because I have never seen TIPS anywhere other than in books and see people talking about them. Also, what is the thinking and ideas behind these trades? As in, what do they actually mean, I hear Bloomberg and sqwawk guys going on about spreads and yields "blowing out", like Portugese or Spain or something, wherever it may be, what does that mean? For the country and for the markets and how does one place a trade to use that to his effect? What would he have to place a trade on? Does a higher yield mean that country is more risky than it was before with lower yields, therefore their bonds would be going down if yields blew out? Which would.....widen the spread to US Treasuries? I'm sure I have more questions but can't think of anything extra just yet, I know there is a lot there but anyone that knows, please let me know because it bugs the hell out of me, I read/hear about this kinda thing all the time but don't really know what it all means and how one benefits from it. Sure I can read about it in books and in textbooks(which I am doing, but it takes forever because of all the puffed up fancy words), but I want to know how it works in the real world and what traders do and how they actually put the trade on with weird things like this(weird to me, never seen TIPS or Portugese spreads on Interactive Brokers platform or TT or anything) and what it ACTUALLY means when these things happen(yields blowing out, spreads etc etc.). I want/need to expand myself, trading for me is scalping the Bund in trades that last a few seconds to minutes, so whether I should or shouldn't, I don't really know what all these things mean, so any help is very much appreciated.

Aug 13, 2011, 7:14am	#2
Martinghoul Legendary Member Member Since Feb 2009 2,456 Posts	Re: Can someone explain? Jeez, mate... Lots of questions. They're simple questions, but you have to be more specific. Can you just put up a list, so that I can respond item by item? __________________ "Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness."

Aug 13, 2011, 11:16am	#4
Martinghoul Legendary Member Member Since Feb 2009 2,456 Posts	Re: Can someone explain? 1. There's a variety of products (derivatives) in a variety of asset classes that allow you to trade volatility. These range from vanilla options (not a pure volatility bet) to variance swaps to VIX futures etc. Simplistically, when you buy an option you're long volatility and when you sell, you're short. Volatility is a very very big subject and there's a lot of stuff that can be said and discussed about it. You'll need a thread for it alone. 2. A yield curve spread trade is one where you buy/sell a shorter-maturity bond vs selling/buying a duration-weighted amount of a longer-maturity bond. When you're short the longer-dated bond, the position is known as a steepener (performs when the yield curve steepens, i.e. longer-dated yields rise more than shorter-dated ones); otherwise, it's a flattener. 3. A very loaded question. There's a whole variety of ways one can model the shape of the yield curve and a lot of factors determine that shape. So different people would rely on different techniques. Most traders who bet on the outright level of yields (such as in your example) base their conclusions on macroeconomic analysis and forecasting. 4. When people talk about corps, they normally use USTs as sort of a baseline. So you're correct and all other bonds trade as a yield spread to USTs. To get the yield for a corp bond, you would add the "spread" to the yield of the corresponding maturity UST. Spread blowing out means that the corp bond yield is rising relative to the UST yield. 5. It's the same for countries, more or less. For most European sovereigns the most important metric is currently the yield spread of that sovereign's bonds to German sovereign bonds. So in that case as well, "spread widening" means yields are rising, which can be interpreted as the mkt perceiving the country's sovereign risk rising. To actually trade the spread you would buy/sell a Portuguese bond vs selling/buying a German bond (or bond futures, where available). 6. These trades are mostly done in the world of interest rate swaps (although you can do it bonds as well). For example, 5y 5y forward is a 5y swap that starts in 5 years. So 5y 5y fwd vs 20y 10y fwd steepener means that you go long (receive fixed) on a 5y swap that starts in 5y vs going short (pay fixed) on a 20y swap that starts in 10y. 7. TIPS stands for "Treasury Inflation-Protected Security". It's an inflation-linked bond, i.e. a bond whose cashflows vary with inflation. You can buy and sell a TIPS just like you could any bond. As to EURIBOR and LIBOR, those are money mkt rates (specifically, rates on unsecured deposits traded in the London interbank mkt). People do trade these very actively, because these rates rising and falling affect a lot of things in the economy. As to tickers in platforms, you need to look more carefully or maybe the platforms you have checked don't offer these products. 8. Basically, because a bond price depends on the bond's coupon and has some other not so handy features, while yield doesn't (more or less). So yield is a single measure that captures everything you need to know about a bond. Obviously, bond trade settlement is based on price. Moreover, if you're talking about a specific bond in a specific context then its price is occasionally used. At any rate, it's not really correct to say that bonds are quoted in price. In reality, they're quoted in either price or yield and/or both. 9. I am not sure what you mean. Macro punters look at the overall macroeconomic environment, so all sorts of data releases etc. Obviously, "where the money is flowing and where the most opportunity is" is what it's all about, but how are you supposed to know that? 10. It's really not accurate to talk about "spreads" outside of a specific context. You'll soon get very very confused because lots of completely different things are referred to as "spreads". So you need to focus on a specific asset class/mkt, where a "spread" is likely to describe something everyone understands. For example, in the US rates mkt, when people talk about spreads, they're normally referring to swapspreads, i.e. the spread between interest swap rates and UST yields. If you want to know what these things generally are, there's a lot of books on the various subjects that you have touched on. In terms of access, yes, some of these mkts are only accessible by institutional types of accounts. Bloomberg does allow you to see prices in these mkts, but doesn't necessarily give you access. Anyways, hope it helps and I am sure you're likely to have more questions, since you have covered a lot of very varied ground. __________________ "Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness."

Aug 14, 2011, 6:31pm	#7
Martinghoul Legendary Member Member Since Feb 2009 2,456 Posts	Re: Can someone explain? Right, now as to the points above: 1. Yes, generally speaking, being long VIX is a long volatility position. It's a different position to the one you get when you're long a vanilla option (it's sort of a proxy to a portfolio of options), but in terms of volatility it's similar. 3. The curve can look any way it pleases and there's no rule about what it can and cannot do. If the "right" shape were given somewhere, what would be the point of trading? 4. A corporate bond is a bond that's issued by a private company. The baseline for other countries' yield spreads depends on which countries they are. If it's a European country, it's unlikely people would talk about its bond spread to USTs. When I say "USTs" I mean actual cash bonds. ZN, ZB etc are bond futures, i.e. derivatives, whose underlying are cash USTs. 5. You don't know, so you need the context and, if it's still not clear, make sure you check. Germany is commonly used as a "baseline" for European sovereigns, because it's perceived to be a "healthiest" sovereign in the Eurozone. Perceptions of sovereign risk rising is a bad thing and it affects the particular country in question. 6. And interest rate swap is a very common derivative that is used a lot in the fixed income mkt. It's a LIBOR derivative, so it's different to bond futures (ZB, ZN, etc), which is what makes it useful. It's a large and liquid mkt, which is why people trade it alongside the other mkts, such as bonds. As to how interest rate swaps are traded, that's probably for another thread. 7. Well, TIPS are directly tradable, whereas LIBOR/Euribor rates aren't (not practically anyway). You can trade derivatives on LIBOR/Euribor and yes, you do need to read things. 8. Getting a price from a yield (and vice versa) for a cash bond is a simple exercise. Doing the same for a bond futures contract is slightly more tricky and you need to know how bond futures contracts (such as Bund and Schatz) are actually defined. Do you know? 9. You're right... Very hard to come up with hard and fast rules (see my post above). The mkt moves in mysterious ways and you have to come up with your own analyses and conclusions all the time. 10. I suppose the current spreads that make all the difference to bund/bobl/schatz are the yield spreads between Italian and German govt bonds. At the moment that's the number that counts. __________________ "Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness."

Aug 14, 2011, 7:23pm	#8
Jason101 Veteran Member Member Since Oct 2008 879 Posts	Re: Can someone explain? Martinghoul - What a nice and giving chap. __________________ ************************************************ ************** We don’t see things as they are. We see things as we are. There is no Holy Grail. There is no perfect way to capture that move from $ 100/ ounce to $ 800/ ounce in gold. ********************************************** ******************

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