10 Comments
 
Vagabond85

Relative value trades, high yield (less rates sensitive), foreign currency exposure (where you think the fx will perform), catalyst driven distressed opportunities

what are some sample relative value trades and if they think CAD will strengthen, they would purchase CAD bonds as that will help when converted back right ?

 

Easy. Rates are rising, people are shortening their duration(price sensitivity to changes in rates), so the short end of the curve outperforms relative to the long end (so if you buy 2 years while shorting the 30 year sector at amounts so that you're DV01 neutral, you'll make money). On the flip side, as a sell side trader, you can and probably would take advantage of the fact that volatility is often times driven by fear and irrationality, which leads to securities being overbought/sold. So in this case you would do the opposite hoping for a correction.

 

Decrease duration in a portfolio by buying shorter term bonds, particularly high-yield/corporates, and switch to floating rate yields in your long term positions. Depending on your risk tolerance, you could also buy options to get some leverage and increase returns in fixed income, but I wouldn't use this as a main strategy; it's risky, the market can be illiquid depending on the bond, and obviously, you only get paid if you're right. That said, the market is overreacting to fed commentary and will continue to do so for at least another year, so buying calls isn't a bad idea if you know what you're doing.

 
budfox55

Easy. Rates are rising, people are shortening their duration(price sensitivity to changes in rates), so the short end of the curve outperforms relative to the long end (so if you buy 2 years while shorting the 30 year sector at amounts so that you're DV01 neutral, you'll make money). On the flip side, as a sell side trader, you can and probably would take advantage of the fact that volatility is often times driven by fear and irrationality, which leads to securities being overbought/sold. So in this case you would do the opposite hoping for a correction.

how about the notion that yields on the short end are artificially low from Fed's policy and the tightening will result these to come up? this would cause a flattening of the yield curve instead

 
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