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Trading treasuries... what do I need to know?
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Trading treasuries... what do I need to know?

  #1 (permalink)
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Trading treasuries... what do I need to know?

I have been watching the 10 year and 30 year off and on for a while, trying to really "figure out" the bond market, but only in the sense of how it "works" and correlates with the equities market. I have only ever taken one bond trade, and never traded notes.

In my very limited perspective of these (and all) markets, I see commodities, particularly metals/energy, as the "fast lane, reckless youngster" of the markets; I see equity indexes as the "more grown up but still a wild side"; and I envision treasuries as the "sage, wise, mature" market that shakes its head at the others in disbelief at how skittish and immature they can be. I suppose currencies are really the "I am the omnipotent being" markets, but I'm not going there at the moment.

I was inspired to write this by @PandaWarrior, who just mentioned he has been toying with notes recently. And further inspired by @tigertrader, who described an trade from earlier today in the bonds. And also inspired by @addchild, who, from my perspective, seems to be Mr. Bond (or maybe he's Mr. Note).

My questions, in no particular order:

1) Am I crazy for becoming interested in treasuries when so many other traders are interested only in the sexy (gold, oil) but bipolar products?

2) I moved from oil to S&Ps about 2 years ago. I will be an S&P trader forever. But will adding treasuries be a useful endeavor for someone like me, in your opinion?

3) One of the first things I noticed about bonds is that there is not as clear a delineation between pit hours and non-pit hours, as far as the volume goes. For example, here is ES:

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Pretty clear pattern. Every day at 9:30am ET the volume comes in, without fail, under normal trading conditions. But here is the 10 year:

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There is a much more gradual advance in volume from around midnight. It does not seem that the 7:20 - 14:00 CT bond pit hours are as "respected" as the equities hours are in the ES. So, I am not sure as how best to define a "day" at this point.

4) Bonds or notes -- if trading outright, which do you go with? Notes has more volume, but that's really a non-issue in my case. And, do most treasury traders even trade outright, or are most of them spreading?

5) Clearly treasuries respond to much of the same economic data that the ES does. However, I know I need to be aware of auction results, such as the bid-to-cover ratio of the auction, rate, etc. But what else does a treasury trader need to look at that I currently probably am not looking at as an equity index trader?

Thanks for your replies!

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  #3 (permalink)
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Got a few hours or days...

I've been trading them since '82 and I am still learning about them

I recommend reading one of Tony Crecenzi's books or just hang out on PIMCO's site and read some of their white papers.

Then if you have any questions you can direct them to me, if you like.

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  #4 (permalink)
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Here's what you got to do:

1. Ditch your charts (mostly).
2. Learn about the yield curve.

Thats about it.

A bit more info:

Professionals trade the curve. Period. Just like professional commodity traders trade the oil curve, gas curve, etc (seeing as you mention commodities) via spreads, flys, ratios, crack spreads etc. It's pretty rare a successful bond trader will punt an outright.

Retail rates and technology will NOT be prohibitive. I know bank traders who are charged $1.50 commission per side alone (BEFORE exchange fees) to execute electronically through Bloomberg (VERY basic functionality).

It's a very maths driven market, based on macro economic themes. Currencies are probably bigger drivers than equities. Fixed income will drive equities. Equities will rarely impact the FI market.

You're going to have to learn about the whole curve - from OIS market, fed funds, Eurodollars all the way across to the 30 year to really understand a particular part of the curve such as NOB spreads. Sometimes the short end is the driver, sometimes the long end (when you understand that/why, you will get why the inverted yield curve is a precursor to looming disaster for stock investors)

Heres a good free clue as to why that is:

Duration, Cheapest to deliver, DV01 are themes to google. Also Relative Value, Basis, Repo, Swap.

Essentially the idea is to understand how the yield curve is moving with the (daily) news, and the implications of market sentiment will have on the curve. Day trading mispricing in the curve is possible, as is taking longer term views or positions on the curve. The ratios you decide upon will be a big factor of your success.

Try reading The Bond Market by Christina I. Ray. Then you will throw away your charts and realise why TA is such a f*cking bad joke, and how to trade professionally.

Another good free toll for EVERY trader:

If you just want to daytrade outrights for points not handles, then forget all the above and just look at it as if it were the price of apples and oranges much as day traders do when trading any other outright. Nothing wrong in that per se - but it's a tough gig and few succeed as we all know.

Hope that gives some direction.

Last edited by TheDude; June 26th, 2013 at 01:03 PM.
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