Anyone an active bond trader here? I work in the primary markets and create the paper floating around out there that everyone has so much fun trading, but I don’t have a feel for what hoops individuals have to jump through for capital requirements. It’s interesting that in the option markets, individuals have to put up collateral for the maximum possible loss, versus banks and insurance companies that only have to put aside loss reserves for a few standard deviations of loss.
My question is, for Bonds specifically, if you are long a bond and short one with a lower yield, what do you have to post for collateral?
The difference in market value at the time of the trade? Say both are trading at par. The bonds have equal maturity and identical terms, except one has a 3% coupon and one has 6% coupon. Day one cash flow is +1000 -1000 = $0. I’m asking in the context of an individual investor. Also do you know if this is driven by legal capital requirements or is this dictated by the broker?
No retail investor in his right mind should be trading fixed income - poor liquidity, and one hell of an information disadvantage. Buy bond mutual funds for retirement, or maybe take macro positions in asset classes via ETFs, but certainly don't think you can go up against a fixed income salesman and walk out with your shirt.
You could try Bond futures if you are asking about taking a position. Buy or sell the derivative post the margin and now you are trading on the yield change.
http://www.interactivebrokers.com/en/p.php?f=margin&p=b&ib_entity=llc
I know it's somewhat of a cop out to just throw out the link, but it should give you a decent breakdown of the costs and margins. I won't reiterate to you what it says, hopefully that's helpful.
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