How would one go about shorting Eurozone bonds?

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Lauretta
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How would one go about shorting Eurozone bonds?

Post by Lauretta »

Is it possible for retail investors to short Eurozone bonds, and if so how does one go about doing it?
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TheMadEph
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Re: How would one go about shorting Eurozone bonds?

Post by TheMadEph »

Do you think that the EU central bank is going to start hiking rates?

Which is a passive aggressive way of saying, why bother? for a retail investor with (I am assuming here) a relatively normal size portfolio this would seem to be an awful lot of effort to achieve whatever you are trying to achieve. Which - btw - is still not clear to me - are you hedging, do you just want to make a directional bet on the ECB, have you lost faith in certain EU zone countries/corporations?
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Re: How would one go about shorting Eurozone bonds?

Post by JBTX »

Lauretta wrote: Wed Sep 11, 2019 1:54 pm Is it possible for retail investors to short Eurozone bonds, and if so how does one go about doing it?
Shorting anything is generally a bad idea unless you are very risk tolerant and have experience doing it.
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Re: How would one go about shorting Eurozone bonds?

Post by mikemikemike »

You could short, or buy put options, on GGOV (ProShares German Sovereign/Sub-Sovereign ETF), or other ETFs that buy European bonds.

But either of those approaches carry a lot of risk. I would not advise doing either.
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Re: How would one go about shorting Eurozone bonds?

Post by actuallyxy »

You could use this ETF

Amundi ETF Short Govt Bond EuroMTS Broad Investment Grade 10-15 Daily UCITS ETF

I wouldn't do it
rascott
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Re: How would one go about shorting Eurozone bonds?

Post by rascott »

Most "efficient" way would be short selling a Eurobond future. They are in 100k EUR$ increments.... so that would be the smallest position you could take. You wouldn't need to post nearly that much, but would just need to prepare to fund a margin call if it went even further negative. Honestly, downside would be fairly low, I'd think.
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Re: How would one go about shorting Eurozone bonds?

Post by robertmcd »

Shorting sovereign bonds is a great way to lose money.
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Re: How would one go about shorting Eurozone bonds?

Post by rascott »

robertmcd wrote: Wed Sep 11, 2019 2:46 pm Shorting sovereign bonds is a great way to lose money.

Or you could go long and just guarantee to lose money, since they are negative yield?

If I short them, do I get paid implied coupons? Head spinning?

:sharebeer
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Re: How would one go about shorting Eurozone bonds?

Post by robertmcd »

rascott wrote: Wed Sep 11, 2019 2:59 pm
robertmcd wrote: Wed Sep 11, 2019 2:46 pm Shorting sovereign bonds is a great way to lose money.

Or you could go long and just guarantee to lose money, since they are negative yield?

If I short them, do I get paid implied coupons? Head spinning?

:sharebeer
Losing money in nominal terms, but not real terms due to deflation. That was my central banker answer. :wink:
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Re: How would one go about shorting Eurozone bonds?

Post by Lauretta »

rascott wrote: Wed Sep 11, 2019 2:21 pm Most "efficient" way would be short selling a Eurobond future. They are in 100k EUR$ increments.... so that would be the smallest position you could take. You wouldn't need to post nearly that much, but would just need to prepare to fund a margin call if it went even further negative. Honestly, downside would be fairly low, I'd think.
Thanks. Why would that be more efficient than buying an ETF shorting bonds, which another Boglehead has pointed out above? (I did not know such ETFs existed). It's easier for me to invest in ETFs as I already know how to do it but if selling short a future is better I can look into it.
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Re: How would one go about shorting Eurozone bonds?

Post by Lauretta »

actuallyxy wrote: Wed Sep 11, 2019 2:17 pm You could use this ETF

Amundi ETF Short Govt Bond EuroMTS Broad Investment Grade 10-15 Daily UCITS ETF

I wouldn't do it
Thanks! I did not know it existed. The only drawback (for what I wanted to do) is that it has broad investment grade bonds, whereas I was interested in AAA bonds, which have negative rates so that in the long run are bound to go down.
Why wouldn't you do it?
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Re: How would one go about shorting Eurozone bonds?

Post by rascott »

Lauretta wrote: Thu Sep 12, 2019 10:17 am
rascott wrote: Wed Sep 11, 2019 2:21 pm Most "efficient" way would be short selling a Eurobond future. They are in 100k EUR$ increments.... so that would be the smallest position you could take. You wouldn't need to post nearly that much, but would just need to prepare to fund a margin call if it went even further negative. Honestly, downside would be fairly low, I'd think.
Thanks. Why would that be more efficient than buying an ETF shorting bonds, which another Boglehead has pointed out above? (I did not know such ETFs existed). It's easier for me to invest in ETFs as I already know how to do it but if selling short a future is better I can look into it.

I imagine that the ETF is doing the same thing as you could do, (shorting the future). I haven't looked at the fund, but you are basically paying them a fee to do the work for you. That's why I said it's the most efficent method, but the size may be too large for what you want.... and you have the risk for some user error.... though it's really not much different than buying/ selling any other ticker symbol. You'd need a margin account setup, however.
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Re: How would one go about shorting Eurozone bonds?

Post by psteinx »

Lauretta wrote: Thu Sep 12, 2019 10:19 am
actuallyxy wrote: Wed Sep 11, 2019 2:17 pm You could use this ETF

Amundi ETF Short Govt Bond EuroMTS Broad Investment Grade 10-15 Daily UCITS ETF

I wouldn't do it
Thanks! I did not know it existed. The only drawback (for what I wanted to do) is that it has broad investment grade bonds, whereas I was interested in AAA bonds, which have negative rates so that in the long run are bound to go down.
Why wouldn't you do it?
While a negative yield implies, over roughly the duration of the bonds, a negative return, keep in mind that's a negative EURO return. Presuming you're an investor interested in dollar returns, keep in mind that the Euro could appreciate, even as Euro bonds, funds, etc. have a negative return. (The Euro could depreciate, too, of course.)
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Re: How would one go about shorting Eurozone bonds?

Post by Lauretta »

psteinx wrote: Thu Sep 12, 2019 10:55 am
Lauretta wrote: Thu Sep 12, 2019 10:19 am
actuallyxy wrote: Wed Sep 11, 2019 2:17 pm You could use this ETF

Amundi ETF Short Govt Bond EuroMTS Broad Investment Grade 10-15 Daily UCITS ETF

I wouldn't do it
Thanks! I did not know it existed. The only drawback (for what I wanted to do) is that it has broad investment grade bonds, whereas I was interested in AAA bonds, which have negative rates so that in the long run are bound to go down.
Why wouldn't you do it?
While a negative yield implies, over roughly the duration of the bonds, a negative return, keep in mind that's a negative EURO return. Presuming you're an investor interested in dollar returns, keep in mind that the Euro could appreciate, even as Euro bonds, funds, etc. have a negative return. (The Euro could depreciate, too, of course.)
Hi, I will retire in Italy so I am actually interested in Euro returns. There's this ETF: Daily (-1x) Inverse UCITS ETF - Acc LU1523099700 on German 10 year bonds that seems interesting for what I want to do. It just says that they have 'rolling' every 3 months which I don't know what it means, so I'll have to do a bit of studying on how the ETF works. :shock: But over the long term it should go up in value unless I am missing something.
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Re: How would one go about shorting Eurozone bonds?

Post by actuallyxy »

Lauretta wrote: Thu Sep 12, 2019 10:19 am
actuallyxy wrote: Wed Sep 11, 2019 2:17 pm You could use this ETF

Amundi ETF Short Govt Bond EuroMTS Broad Investment Grade 10-15 Daily UCITS ETF

I wouldn't do it
Thanks! I did not know it existed. The only drawback (for what I wanted to do) is that it has broad investment grade bonds, whereas I was interested in AAA bonds, which have negative rates so that in the long run are bound to go down.
Why wouldn't you do it?
The German 10 year bund has a yield of about -0.5%. In theory, by shorting it you could make an annual return of inflation plus 0.5%.

But in the real world, shorting is not free. To short something, you borrow it, sell it and hope that later you can rebuy it cheaper and pocket the difference. But to buy bonds means to lend money to somebody else. So, when you short the German bund, you are borrowing with your left hand from some third party, and then lending with your right to Germany, eating up all the costs and risks in the process.

Different instruments to short will have different mechanics but all of them will come with fees, possibly with counterparty risk, and they may not behave exactly as you expect (particularly inverse ETFs).

In addition to that, if your portfolio returns are mostly driven by stocks, you may find that these bond shorts go down exactly at the same time as your stocks.
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Re: How would one go about shorting Eurozone bonds?

Post by Lauretta »

actuallyxy wrote: Thu Sep 12, 2019 1:47 pm
Lauretta wrote: Thu Sep 12, 2019 10:19 am
actuallyxy wrote: Wed Sep 11, 2019 2:17 pm You could use this ETF

Amundi ETF Short Govt Bond EuroMTS Broad Investment Grade 10-15 Daily UCITS ETF

I wouldn't do it
Thanks! I did not know it existed. The only drawback (for what I wanted to do) is that it has broad investment grade bonds, whereas I was interested in AAA bonds, which have negative rates so that in the long run are bound to go down.
Why wouldn't you do it?
The German 10 year bund has a yield of about -0.5%. In theory, by shorting it you could make an annual return of inflation plus 0.5%.

But in the real world, shorting is not free. To short something, you borrow it, sell it and hope that later you can rebuy it cheaper and pocket the difference. But to buy bonds means to lend money to somebody else. So, when you short the German bund, you are borrowing with your left hand from some third party, and then lending with your right to Germany, eating up all the costs and risks in the process.

Different instruments to short will have different mechanics but all of them will come with fees, possibly with counterparty risk, and they may not behave exactly as you expect (particularly inverse ETFs).

In addition to that, if your portfolio returns are mostly driven by stocks, you may find that these bond shorts go down exactly at the same time as your stocks.
yes these are all good points which I had more or less supsected though I don't have enough knowledge of the shorting process. This fund Lyxor Index Fund - Lyxor Bund Daily (-1x) Inverse UCITS ETF Acc | BUNS LU1523099700 has 'total fees' of 0,15% but perhaps there are more costs involved. So probably it is indeed not worth it; it woud be worth it if interest rates go up meaning that the value of the bonds decreases; I believe that this must happen at some point since it seems to me a crazy situation to have negative rates. And besides it is not healthy since as Dalio noted in an interview these negative rates don't give much room for manouver in case of a crisis.
You say that if stocks fall bonds go up, but how much more can they go up considering the current rates?!
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Re: How would one go about shorting Eurozone bonds?

Post by JoMoney »

I'm curious, if you short the Euro, what currency would you be going long ?
These things always trade in pairs, you have to put it in something else that you believe the thing being shorted will perform relatively worse against.
Would you keep it in shorter term Euro cash?
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Re: How would one go about shorting Eurozone bonds?

Post by actuallyxy »

Lauretta wrote: Fri Sep 13, 2019 7:27 am
actuallyxy wrote: Thu Sep 12, 2019 1:47 pm
Lauretta wrote: Thu Sep 12, 2019 10:19 am
actuallyxy wrote: Wed Sep 11, 2019 2:17 pm You could use this ETF

Amundi ETF Short Govt Bond EuroMTS Broad Investment Grade 10-15 Daily UCITS ETF

I wouldn't do it
Thanks! I did not know it existed. The only drawback (for what I wanted to do) is that it has broad investment grade bonds, whereas I was interested in AAA bonds, which have negative rates so that in the long run are bound to go down.
Why wouldn't you do it?
The German 10 year bund has a yield of about -0.5%. In theory, by shorting it you could make an annual return of inflation plus 0.5%.

But in the real world, shorting is not free. To short something, you borrow it, sell it and hope that later you can rebuy it cheaper and pocket the difference. But to buy bonds means to lend money to somebody else. So, when you short the German bund, you are borrowing with your left hand from some third party, and then lending with your right to Germany, eating up all the costs and risks in the process.

Different instruments to short will have different mechanics but all of them will come with fees, possibly with counterparty risk, and they may not behave exactly as you expect (particularly inverse ETFs).

In addition to that, if your portfolio returns are mostly driven by stocks, you may find that these bond shorts go down exactly at the same time as your stocks.
yes these are all good points which I had more or less supsected though I don't have enough knowledge of the shorting process. This fund Lyxor Index Fund - Lyxor Bund Daily (-1x) Inverse UCITS ETF Acc | BUNS LU1523099700 has 'total fees' of 0,15% but perhaps there are more costs involved. So probably it is indeed not worth it; it woud be worth it if interest rates go up meaning that the value of the bonds decreases; I believe that this must happen at some point since it seems to me a crazy situation to have negative rates. And besides it is not healthy since as Dalio noted in an interview these negative rates don't give much room for manouver in case of a crisis.
You say that if stocks fall bonds go up, but how much more can they go up considering the current rates?!
In a stock bear market, government bonds msy go up because of a 'flight to safety' effect, regardless of interest rates.

ETF fees will not include the cost of borrowing. I don't know what that may be.

My explanation of how shorting a bond works was not accurate, but the bottom line is that you would be chasing a limited return with complex financial instruments that have high costs and high risks.

Also I cannot see how this would work in the context of a more or less sane portfolio. Would you hold stocks, euro bond shorts, and then other bonds? Or just stocks and euro bond shorts?
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Re: How would one go about shorting Eurozone bonds?

Post by Lauretta »

actuallyxy wrote: Fri Sep 13, 2019 8:46 am

Also I cannot see how this would work in the context of a more or less sane portfolio. Would you hold stocks, euro bond shorts, and then other bonds? Or just stocks and euro bond shorts?
Stocks, real estate, cash, assurance vie (a contract in France and Luxembourg where your capital is garanteed and at present is earning roughly 2-3%) and loading up on gold at the moment. I am totally unable ot understand the point of bonds for Eurozone investors (except eventually for the flight to safety phenomenon and rebalancing bonus) so I don't have any.
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Re: How would one go about shorting Eurozone bonds?

Post by Lauretta »

JoMoney wrote: Fri Sep 13, 2019 8:10 am I'm curious, if you short the Euro, what currency would you be going long ?
These things always trade in pairs, you have to put it in something else that you believe the thing being shorted will perform relatively worse against.
Would you keep it in shorter term Euro cash?
I don't understand your question.
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Re: How would one go about shorting Eurozone bonds?

Post by rhe »

Lauretta wrote: Fri Sep 13, 2019 9:16 am
JoMoney wrote: Fri Sep 13, 2019 8:10 am I'm curious, if you short the Euro, what currency would you be going long ?
These things always trade in pairs, you have to put it in something else that you believe the thing being shorted will perform relatively worse against.
Would you keep it in shorter term Euro cash?
I don't understand your question.
If you sell a eurozone bond short, you will be given a pile of euros in exchange for the bond you sold. Short term euro interest rates are even lower than long term rates, so if you keep this money in euros you will have a "negative carry" position. That is, if nothing changes you will lose money continuously for as long as you hold the position. The classic example of this problem is the people who shorted japanese government bonds because japanese interest rates "had to go up".

On the other hand, if you exchange the euros into dollars you will now have a positive carry position because the dollar interest rate is comparatively high. This is the classic "carry trade", where you make money every year until the year that you don't.
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Re: How would one go about shorting Eurozone bonds?

Post by Lauretta »

rhe wrote: Sat Sep 14, 2019 12:18 am
Lauretta wrote: Fri Sep 13, 2019 9:16 am
JoMoney wrote: Fri Sep 13, 2019 8:10 am I'm curious, if you short the Euro, what currency would you be going long ?
These things always trade in pairs, you have to put it in something else that you believe the thing being shorted will perform relatively worse against.
Would you keep it in shorter term Euro cash?
I don't understand your question.
If you sell a eurozone bond short, you will be given a pile of euros in exchange for the bond you sold. Short term euro interest rates are even lower than long term rates, so if you keep this money in euros you will have a "negative carry" position. That is, if nothing changes you will lose money continuously for as long as you hold the position. The classic example of this problem is the people who shorted japanese government bonds because japanese interest rates "had to go up".

On the other hand, if you exchange the euros into dollars you will now have a positive carry position because the dollar interest rate is comparatively high. This is the classic "carry trade", where you make money every year until the year that you don't.
Thanks. That's interesting. So, if I understand this correctly, unless you use another currency this would only potentially work in the case that the yield curve is inverted? (so that short term rates are higher than long term one?) So it would probably work in the US instead at present! :D

In practice, in my case however: 1. Short term euro interest rates are zero for me as I keep them in a bank that does not charge negative rates (admittedly that could change) and 2. I would actually do it with the Lyxor ETF I mentioned in the thread above, so I would not be given euros. However indeed if the ETF works by selling bonds and keeping money at a lower interest rate as you have described, it's not very cool.

I must find out more about the ETF, I am thinking that perhaps it's not worth the trouble and the risk to do it for such a small potential profit, but it's interesting to look into it and learn all these possibilities. :happy
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Re: How would one go about shorting Eurozone bonds?

Post by rhe »

Lauretta wrote: Sat Sep 14, 2019 1:27 am Thanks. That's interesting. So, if I understand this correctly, unless you use another currency this would only potentially work in the case that the yield curve is inverted? (so that short term rates are higher than long term one?) So it would probably work in the US instead at present! :D

In practice, in my case however: 1. Short term euro interest rates are zero for me as I keep them in a bank that does not charge negative rates (admittedly that could change) and 2. I would actually do it with the Lyxor ETF I mentioned in the thread above, so I would not be given euros. However indeed if the ETF works by selling bonds and keeping money at a lower interest rate as you have described, it's not very cool.

I must find out more about the ETF, I am thinking that perhaps it's not worth the trouble and the risk to do it for such a small potential profit, but it's interesting to look into it and learn all these possibilities. :happy
Exactly: a short position in a bond would be positive carry in the case where the yield curve is inverted. Of course, this doesn't necessarily make that trade a good idea, because inverted yield curves are dangerous, and a recession would generally be bad for a short bond position.

You're right that there's an arbitrage opportunity around savings accounts that pay zero interest rather than a negative interest rate. You have to be careful that transaction costs don't eat up all the potential arbitrage gains. The easiest case to think about is where rather than buying European stocks directly, you go long the futures and keep the cash in a bank account. Your tax situation is likely to determine whether this is a good idea or not.
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