How to short Deutsch Bund with current low rate?

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HenrySouthernCal
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Joined: Thu Dec 21, 2017 11:33 pm

How to short Deutsch Bund with current low rate?

Post by HenrySouthernCal » Thu May 30, 2019 10:46 pm

The yield on Germany 10 yr government bond is now -0.18%, lowest in the world now and, almost at the multi-decade low reached previously on summer of 2016. I doubt there is enough room for further drop on that kind of low rate. I wonder if there is a good way to short it. In U.S. we can short Treasury through ETF TLT. I wonder if there is some way for retail investors to short bund, preferably currency hedged.

SovereignInvestor
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Re: How to short Deutsch Bund with current low rate?

Post by SovereignInvestor » Thu May 30, 2019 11:16 pm

You can probably short the bunds directly with Interactive Brokers. Hedging the currency is going to be expensive generally. If it were cheap then one can short Bunds all day and get paid 0.20% to do so and invest the cash in dollars at 2% or so yields. There's no free lunch.

rhe
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Re: How to short Deutsch Bund with current low rate?

Post by rhe » Fri May 31, 2019 3:02 am

On IB it is cheap to short the future, but likely expensive to short the cash bond. Look at GBL for the bund future, and I for the all the short term euro interest rate futures.

When you use futures you are not exposed to the currency: if you are long GBL, you are effectively long a bund, and short a corresponding amount of euros at something close to the three month rate. A short position would be the reverse.

You may want to think very carefully before taking a short position. It is true that the 10 year yield is low, but the short term rate is even lower. If you are short the 10 year, you have a "negative carry" position: if interest rates don't change, you will lose money over time. A quick look suggests that you are looking at a 1% negative carry per year, but I haven't thought about this carefully so I might be wrong (I think the instantaneous forward rate is the right one to use, but I'm not totally sure).

Some people took out positions like this on japanese bonds, and lost money year after year until they either gave up or went bankrupt.
SovereignInvestor wrote:
Thu May 30, 2019 11:16 pm
You can probably short the bunds directly with Interactive Brokers. Hedging the currency is going to be expensive generally. If it were cheap then one can short Bunds all day and get paid 0.20% to do so and invest the cash in dollars at 2% or so yields. There's no free lunch.

jminv
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Joined: Tue Jan 02, 2018 10:58 pm

Re: How to short Deutsch Bund with current low rate?

Post by jminv » Fri May 31, 2019 5:51 am

HenrySouthernCal wrote:
Thu May 30, 2019 10:46 pm
The yield on Germany 10 yr government bond is now -0.18%, lowest in the world now and, almost at the multi-decade low reached previously on summer of 2016. I doubt there is enough room for further drop on that kind of low rate. I wonder if there is a good way to short it. In U.S. we can short Treasury through ETF TLT. I wonder if there is some way for retail investors to short bund, preferably currency hedged.
Why do you think the yield can't go lower or just stay where it is? Why is it that you think the yield is near a multi-decade low? Not a great idea. You're basically betting on an upturn in the German and, to a lesser extent the EU and global economies if you do that.

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alpenglow
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Re: How to short Deutsch Bund with current low rate?

Post by alpenglow » Fri May 31, 2019 8:19 am

HenrySouthernCal wrote:
Thu May 30, 2019 10:46 pm
The yield on Germany 10 yr government bond is now -0.18%, lowest in the world now...
I think the Swiss 10 year bond is somewhere around -0.50% right now.

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HenrySouthernCal
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Re: How to short Deutsch Bund with current low rate?

Post by HenrySouthernCal » Fri May 31, 2019 8:26 am

jminv wrote:
Fri May 31, 2019 5:51 am
HenrySouthernCal wrote:
Thu May 30, 2019 10:46 pm
The yield on Germany 10 yr government bond is now -0.18%, lowest in the world now and, almost at the multi-decade low reached previously on summer of 2016. I doubt there is enough room for further drop on that kind of low rate. I wonder if there is a good way to short it. In U.S. we can short Treasury through ETF TLT. I wonder if there is some way for retail investors to short bund, preferably currency hedged.
Why do you think the yield can't go lower or just stay where it is? Why is it that you think the yield is near a multi-decade low? Not a great idea. You're basically betting on an upturn in the German and, to a lesser extent the EU and global economies if you do that.
I didn't say the yield can't go lower, I mean the space moving down is more limited giving current negative long bond rate. German 10 yer bund has very small term premium. I can't imagine someone wants to hold a long bond with negative rate locked for that long. Yes Germany is in bad economic shape, buy 10 year bond is for future long term expectation, not current market consensus which changes frequently over time.

From other people 's answers, it seems there is no good and simple way to short long german bund like we short stock. It involves currency risk and not cheap to do it.

SovereignInvestor
Posts: 340
Joined: Mon Aug 20, 2018 4:41 pm

Re: How to short Deutsch Bund with current low rate?

Post by SovereignInvestor » Sat Jun 01, 2019 6:28 am

rhe wrote:
Fri May 31, 2019 3:02 am
On IB it is cheap to short the future, but likely expensive to short the cash bond. Look at GBL for the bund future, and I for the all the short term euro interest rate futures.

When you use futures you are not exposed to the currency: if you are long GBL, you are effectively long a bund, and short a corresponding amount of euros at something close to the three month rate. A short position would be the reverse.

You may want to think very carefully before taking a short position. It is true that the 10 year yield is low, but the short term rate is even lower. If you are short the 10 year, you have a "negative carry" position: if interest rates don't change, you will lose money over time. A quick look suggests that you are looking at a 1% negative carry per year, but I haven't thought about this carefully so I might be wrong (I think the instantaneous forward rate is the right one to use, but I'm not totally sure).

Some people took out positions like this on japanese bonds, and lost money year after year until they either gave up or went bankrupt.
SovereignInvestor wrote:
Thu May 30, 2019 11:16 pm
You can probably short the bunds directly with Interactive Brokers. Hedging the currency is going to be expensive generally. If it were cheap then one can short Bunds all day and get paid 0.20% to do so and invest the cash in dollars at 2% or so yields. There's no free lunch.
Yeah to negate Currency risk you'd short 10Y Bunds and invest in short term Bunds but there is negative carry.

If you shorted 10Y bunds and put it in 10Y treasurys there is around a 2% annual carry but massive Currency risk.

Market doesn't offer profit for nothing

Beliavsky
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Re: How to short Deutsch Bund with current low rate?

Post by Beliavsky » Sat Jun 01, 2019 8:28 am

rhe wrote:
Fri May 31, 2019 3:02 am
On IB it is cheap to short the future, but likely expensive to short the cash bond. Look at GBL for the bund future, and I for the all the short term euro interest rate futures.

When you use futures you are not exposed to the currency: if you are long GBL, you are effectively long a bund, and short a corresponding amount of euros at something close to the three month rate. A short position would be the reverse.

You may want to think very carefully before taking a short position. It is true that the 10 year yield is low, but the short term rate is even lower. If you are short the 10 year, you have a "negative carry" position: if interest rates don't change, you will lose money over time. A quick look suggests that you are looking at a 1% negative carry per year, but I haven't thought about this carefully so I might be wrong (I think the instantaneous forward rate is the right one to use, but I'm not totally sure).
The ECB target rate is -0.4%, so the carry on short bunds should be only -0.20% a year, and the trade should have positive skew, since there is a limit to how negative 10-year rates can get (physical cash can be stored at a finite cost).

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JoMoney
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Re: How to short Deutsch Bund with current low rate?

Post by JoMoney » Sat Jun 01, 2019 8:45 am

You need to find a currency you want to be long on that is paying a higher interest rate.
The carry trade should be paying you interest with any decent broker that does forex.
You should be able to use massive amounts of leverage if it's just a currency trade... which would also ratchet up the risk as well, but could be earning a pretty high rate of interest relative to the cash put up to establish the position.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

jminv
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Joined: Tue Jan 02, 2018 10:58 pm

Re: How to short Deutsch Bund with current low rate?

Post by jminv » Sat Jun 01, 2019 10:11 am

HenrySouthernCal wrote:
Fri May 31, 2019 8:26 am
jminv wrote:
Fri May 31, 2019 5:51 am
HenrySouthernCal wrote:
Thu May 30, 2019 10:46 pm
The yield on Germany 10 yr government bond is now -0.18%, lowest in the world now and, almost at the multi-decade low reached previously on summer of 2016. I doubt there is enough room for further drop on that kind of low rate. I wonder if there is a good way to short it. In U.S. we can short Treasury through ETF TLT. I wonder if there is some way for retail investors to short bund, preferably currency hedged.
Why do you think the yield can't go lower or just stay where it is? Why is it that you think the yield is near a multi-decade low? Not a great idea. You're basically betting on an upturn in the German and, to a lesser extent the EU and global economies if you do that.
I didn't say the yield can't go lower, I mean the space moving down is more limited giving current negative long bond rate. German 10 yer bund has very small term premium. I can't imagine someone wants to hold a long bond with negative rate locked for that long. Yes Germany is in bad economic shape, buy 10 year bond is for future long term expectation, not current market consensus which changes frequently over time.

From other people 's answers, it seems there is no good and simple way to short long german bund like we short stock. It involves currency risk and not cheap to do it.
A big reason this would be a risky trade is that you would be betting against the european central bank. It would be a big problem for a short trade in the 10 year Bund if the ECB started actively buying bunds again. If there's a Eurozone slowdown it's very likely that they will. That sort of QE could last for years. Sure, it can only go so low but then that floor would be baked into the pricing of however you might plan to short it.

I see the current secondary market yield is -0.2%. For new or old issues, a bank that doesn't want to lend might prefer to buy a bund yielding a guaranteed minus 0.2% to maturity to the other safe alternative which is holding the cash with the ECB where they will lose 0.4% a year but can lose more if and when the ECB increases that charge to try to stimulate lending. The bund gets this interest because it's the closest to a risk free government bond in the EU. So in that context, it's cheaper for a bank to buy a negative yielding german bund than the alternative option with the ECB where it will lose 0.4%. Then there's institutions that are forced to hold government debt regardless. As we have seen in other periods, people will hold zero or negatively yielding assets longer than the people shorting them can stay solvent.

As you say, the costs are high so you dont want to move forward anyway. Still, you might prefer to go long an asset class you think will do well due to your thesis, ie, the asset is inversely correlated with 10 year german bunds. For example,in the American context, if I think there will be a market drop in the usa in a year or two due, signalled by an inverted yield curve, I could go long TLT rather than short the market (-0.47 correlation to VTI) or vice versa if I thought TLT yield was abornmally low and people wouldn't accept to hold that for long. I could get the exposure I wanted by leveraging up through options, futures, whatever. The asset you want to go long could be us dollar denominated to deal with your currency risk. You can test different assets to find their correlations. Don't give up on your trade just because the asset you were looking at won't work for it. Find a different asset that will.

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