Flash Update – January 24, 2020

Published on: January 24th, 2020

Buy bonds, wear diamonds (again) …

Comments

  • RP
    Raoul P. | Founder
    27 January 2020 @ 13:10
    Just some more answers - Why Eurodollars? They are massively liquid, offer big leverage and frankly Im used to using them. Sure you can use Fed funds or an equity that gives short dated bond exposure. Why 10 years? They are massively liquid, offer big leverage and frankly Im used to using them. You can used 30 years TLT or whatever. As you can tell, Im not an exactist. Its whatever works for you. I just use what I know and am comfortable with. Eurodollar options - Yes, I still like them. In the fast moving markets I like my core position as futures. I tend to then layer in options for increased upside but more managed downside risk. How do you protect yourself using so much leverage? I use stops where I am prepared to lose % of NAV on the position. I add all of those up to get the uncorrelated risk that I am running at any one time. So if I have 5 positions all with 2% of NAV at risk and if the shit hits the fan, I should be able to only suffer a max drawdown of 10% (give or take gap risk - which you need to be prepared for). Yes, I like gold and bitcoin but those are bets on systemic issues and are based on a different premise of the End Game, not global slowdown. Different bets. Bonds work best. I don't like shorting equities for this kind of thing as they are still in a bubble and are ever inexact when it comes to trading economic cycles. There will be a time where I will take more equity risk but bonds offer much superior risk adjusted returns. I don't like trading the VIX. It is too volatile, mean reverting and expensive. I'll leave that to the option arb professionals but that is just me. And yes, I love the dollar and will add at some point but I have plenty yon but have been small underwater for a bit in that trade so lets get some profits so we can add on the front foot.
    • IB
      Ivan B.
      27 January 2020 @ 14:53
      Raoul, thank you for the update and answering some of the questions. Is it possible to provide a bit more information in your trade recommendations e.g. with your ED call option trade you provided in the comments below price ranges where this trade would make more sense. Would be also good to know the levels you're looking at for ED futures entry/exit points? Same with 10 Year Bonds futures. I'm not sure if it's possible, but it would be helpful for less experienced subscribers to get as much info as possible to implement and manage these trades. Thank you, Ivan
    • RP
      Raoul P. | Founder
      27 January 2020 @ 15:12
      Ivan - thanks for this but we really can't give all the stops, profits, etc for each person. Its not what the service does really and it should spur you to search for your own answers to your specific needs. If not, we run the risk of running your positions for you, with all the fiduciary risk and legal risk that entails...
    • IB
      Ivan B.
      30 January 2020 @ 10:02
      Raoul, I appreciate your time answering my questions. I should have made it more clear, I am not asking or expecting you to provide personalised stops or profit targets. I understand this is not what MI is about, it's not a trading service. However, I do think giving some price ranges in case of EDs or ZN/TLT for example would be very useful. Futures market can move very fast and there could be a time lag between publishing an update and reading it so knowing at what levels a trade make sense to you is handy. I found your comment to Tim H. question below on how much to pay for the EDZ21 call is what was missing. Just a price range and your logic behind it - priceless :) Anyway, this is just my feedback and I appreciate all you and Julian do.
  • FK
    Firoze K.
    27 January 2020 @ 12:15
    Would IBTL be an alternative to TLT for Brits investing in ISAs?
    • RP
      Raoul P. | Founder
      27 January 2020 @ 12:54
      Yup. Perfectly find. Uk gilts are good too. Just gov bonds in general. But prefer the US.
    • JL
      J L.
      27 January 2020 @ 16:04
      those GBP denominated treasury ETFs are a gem in the expensive ISA brokers
    • FK
      Firoze K.
      27 January 2020 @ 16:55
      Thanks for the prompt response Raoul, very much appreciated!
  • MZ
    Matthew Z.
    27 January 2020 @ 02:24
    If the fed takes rates to zero - every dollar in US money market accounts leaves within 90 days. Does the fed just write the check?
    • RP
      Raoul P. | Founder
      27 January 2020 @ 12:53
      That is not the experience in UK, EU, Switzerland etc.
    • MZ
      Matthew Z.
      27 January 2020 @ 14:23
      Thanks for the reply. I didn't know that but it's interesting - I'm an advisor in the US, 60 mil in aum (so I'm no one). Among my clients, I know of at least 10 mil that flowed to MM's to acquire that 2% yield once it showed up (not all money i have under management - clients w cash). I can tell you advisors sought these funds that were actually paying interest because it had been so long since they did. This is going to be interesting.....
  • CP
    CRAIG P.
    27 January 2020 @ 01:24
    Raoul, Observation: A year back, like Walther, I also asked about your seemingly synonymous use of the words 10 year treasuries and TLT. I noticed after you replied then that you seemed to stop interchanging the two. I’m glad you are clarifying here that there is a difference (10 years of maturity) between the two. Question: I always wondered that if one is expecting a significant decline in longer term interest rates, why use a 10 year treasury vehicle over TLT?
    • RP
      Raoul P. | Founder
      27 January 2020 @ 12:52
      Its just what I am used to 10 yr bond futures while others are used to TLT. I am not fussed about the different duration.
  • BS
    Bevyn S.
    25 January 2020 @ 02:15
    Been watching this TLT and EUR/USD breakout...! Interesting how this is happening even with the repo operations (QE4). Quite telling!
    • WM
      Will M.
      25 January 2020 @ 15:42
      The Repo operations are not QE. They are designed to keep short rates low, not purchase longer term bond assets to keep long rates low.
    • BS
      Bevyn S.
      27 January 2020 @ 02:38
      'Traditional' US QE and repo operations both expand the monetary base, and the path of liquidity certainly matters. If the dollar is breaking out, and it's a sign of more dollar funding issues, it may need to become QE4 (or something else) soon. It'll be interesting to see if the bond and dollar breakouts hold.
  • RP
    Raoul P. | Founder
    26 January 2020 @ 23:27
    Im going to be sending out an update tomorrow...ASAP. Im going to full risk in bonds immediately.
    • YO
      Yoshitaka O.
      27 January 2020 @ 02:10
      Looking forward Raoul!
  • TH
    Trina H.
    25 January 2020 @ 16:56
    Can you please explain the risk of loss on the Eurodollar trade. Is there potential to lose the entire investment? Or more than the entire investment? Some guidance is appreciated.
    • RP
      Raoul P. | Founder
      25 January 2020 @ 20:44
      These are high leverage futures contracts so yes, you have larger risks, best stick to TLT if you aren’t comfortable with futures. But to trade them, you can just out in a stop loss of,the a,limit you are prepared to lose.
    • IB
      Ivan B.
      26 January 2020 @ 07:04
      Raoul, isn’t the suggested Eurodollar call option trade has limited downside e.g. risk of losing only premium paid for the option?
  • WD
    Walther D.
    25 January 2020 @ 14:19
    Raul - Sorry for the potentially dumb question. You talk about 10 year bonds but TLT is 20 year maturity - how should we think about this? Or your recommendation simply long dated treasuries ?
    • JI
      Janne I.
      25 January 2020 @ 15:28
      I was thinking about this same question. I hope someone can clarify this.
    • CS
      Cameron S.
      25 January 2020 @ 18:30
      I think if you're trading futures, the go to is the 10 year. But if you're not trading futures, the best available ETF would be TLT. So it's kind of an either-or depending on what you are trading.
    • JL
      J L.
      25 January 2020 @ 19:47
      There's the IEF ETF 7-10 years but of course not very punchy if you can't leverage it, perhaps therefore a recommendation to use TLT
    • RP
      Raoul P. | Founder
      25 January 2020 @ 20:43
      I just use it as a proxy. It should still work.
  • ZW
    ZH W.
    25 January 2020 @ 04:39
    Raoul, what is your opinion on steepener trades ? 2s/10s and ED6/12. Thanks!
    • RP
      Raoul P. | Founder
      25 January 2020 @ 13:59
      I like them for the longer term. I am long for GMI, but curve might flatten a bit more until we see the next rate cut. Then this trade will pay off very well (but so will ED's and bonds!).
  • TH
    Tim H.
    24 January 2020 @ 22:18
    Hi raoul how much to pay at the maximum for the dec 2021 call you mentioned?
    • RP
      Raoul P. | Founder
      25 January 2020 @ 00:31
      I think we can get to 100, so wouldn't pay more than 15, I go to a shorter dated contract and lower the strike but I don't like options without at least a 3:1 upside and prefer to look for 5:1 +
  • JK
    John K.
    24 January 2020 @ 22:19
    @Raoul, if we had joined you in the Eurodollar positioning for the GE Dec 2020 calls at a 99 strike, should we (a) leave them alone and let them appreciate, or (b) roll them over to the furthest out in time contracts, which appear to be the GE Mar 2021 contracts in IB, or (c) wait to roll them over once the GE Dec 2021 calls are available to roll to, if time/contract terms permit them to roll that far out? Thank you, sir. Regards, John K.
    • RP
      Raoul P. | Founder
      25 January 2020 @ 00:29
      Leave them and add more in 2021... that is what I am suggesting.
  • JW
    John W.
    24 January 2020 @ 21:16
    I took a half position with a TLT Sept 20 Call @ $145. There is a Jan 2022 option offered. If I want to mirror Raoul's December 2021 Euro Dollar call with my othere half position how high should I set my TLT strike? Thanks.
    • RP
      Raoul P. | Founder
      24 January 2020 @ 22:05
      It’s tricky because the yield curve moves. Look for a strike just above the August highs. That should be fine. Look for 20 delta or 30 delta calls, depending on your view.
  • MS
    Mark S.
    24 January 2020 @ 21:50
    Raoul If there is rate cuts starting in the next 3 months, is there greater leaverage to going for the ED with a closer expiry? Say Jun 21 or Dec 20? Thanks in advance.
    • RP
      Raoul P. | Founder
      24 January 2020 @ 22:03
      Yes, I’m long Dec 2020 99 calls still too

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