I use Interactive Brokers, and I can short Treasuries on there. But I've never done it before. It seems like a plausible trade to diversify more portfolio. Any specific years or bonds worth shorting, and when should I cover?

Are you shorting bonds to eliminate interest rate risk, or as a spec? I have a client with a 20mm bond portfolio, almost all corporates, a few bunds... He bought a payer swaption to hedge IR risk. I would caution against shorting too much, no one has enough firepower to fight the fed...

jakedeez wrote:Are you shorting bonds to eliminate interest rate risk, or as a spec? I have a client with a 20mm bond portfolio, almost all corporates, a few bunds... He bought a payer swaption to hedge IR risk. I would caution against shorting too much, no one has enough firepower to fight the fed...

Here is a question -- can I buy a payer swaption as a retail customer somewhere? What is the minimal notional value that the underlying on a swap usually refers to?

(common sense dictates the answer to this question is no, and the amount is 1m and larger, but maybe the answer is different)

scriabinop23 wrote:

jakedeez wrote:Are you shorting bonds to eliminate interest rate risk, or as a spec? I have a client with a 20mm bond portfolio, almost all corporates, a few bunds... He bought a payer swaption to hedge IR risk. I would caution against shorting too much, no one has enough firepower to fight the fed...

Here is a question -- can I buy a payer swaption as a retail customer somewhere? What is the minimal notional value that the underlying on a swap usually refers to?

(common sense dictates the answer to this question is no, and the amount is 1m and larger, but maybe the answer is different)

They don't really like to do less than 5mm. Also an ISDA is required usually for all swaps, although for a payer option, they might not require it since there is no maintenance requirement.

By the way, I don't mean 5mm cash, I mean 5mm notational. Depending on the strikes the dollar amount maybe well under 1mm.

scriabinop23 wrote:Here is a question -- can I buy a payer swaption as a retail customer somewhere? What is the minimal notional value that the underlying on a swap usually refers to?

(common sense dictates the answer to this question is no, and the amount is 1m and larger, but maybe the answer is different)

I think it will depend on your relationship with the bank. If you or your company are a high value customer, they might set up an ISDA to do 5mm notional. For the amount of money they can make on such a small trade, it's just not worth their hassle. Ever since Lehman, credit groups are really tightening up. One counterparty we had a few CDS trades on with wanted us to post collateral that was greater than the value of all the quarterly coupons we would pay over the life of the trade... Totally nonsensical; I think it was their way of saying "we'd really like for you to unwind these."

billdozer wrote:

scriabinop23 wrote:Here is a question -- can I buy a payer swaption as a retail customer somewhere? What is the minimal notional value that the underlying on a swap usually refers to?

(common sense dictates the answer to this question is no, and the amount is 1m and larger, but maybe the answer is different)

I think it will depend on your relationship with the bank. If you or your company are a high value customer, they might set up an ISDA to do 5mm notional. For the amount of money they can make on such a small trade, it's just not worth their hassle. Ever since Lehman, credit groups are really tightening up. One counterparty we had a few CDS trades on with wanted us to post collateral that was greater than the value of all the quarterly coupons we would pay over the life of the trade... Totally nonsensical; I think it was their way of saying "we'd really like for you to unwind these."

Except that we are talking about a payer option, where there is no counterparty risk for the bank. The client just buys the option from the bank.

jakedeez wrote:

billdozer wrote:I think it will depend on your relationship with the bank. If you or your company are a high value customer, they might set up an ISDA to do 5mm notional. For the amount of money they can make on such a small trade, it's just not worth their hassle. Ever since Lehman, credit groups are really tightening up. One counterparty we had a few CDS trades on with wanted us to post collateral that was greater than the value of all the quarterly coupons we would pay over the life of the trade... Totally nonsensical; I think it was their way of saying "we'd really like for you to unwind these."

Except that we are talking about a payer option, where there is no counterparty risk for the bank. The client just buys the option from the bank.

True, but my point was that banks are setting requirements that don't make sense. If I buy CDS protection, the bank's maximum counterparty exposure is the sum of all the quarterly coupons. In the instance I was describing, they were requiring more collateral than their maximum exposure.

billdozer wrote:True, but my point was that banks are setting requirements that don't make sense. If I buy CDS protection, the bank's maximum counterparty exposure is the sum of all the quarterly coupons. In the instance I was describing, they were requiring more collateral than their maximum exposure.

If you buy CDS the bank shouldn't have any counter party exposure; they would have exposure to a default.

garagecapital wrote:I use Interactive Brokers, and I can short Treasuries on there. But I've never done it before. It seems like a plausible trade to diversify more portfolio. Any specific years or bonds worth shorting, and when should I cover?

I'd be careful when shorting UST, especially when they're trading at the upper end of the recent range. A couple of traders who I've talked to have been short going in to recent auction thinking that supply would drive higher yields and got burned when levels held support. Out of the entire curve, the Long Bond has lagged most noticeably, and the Treasury just announce the switch to monthly issuance.