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Investing in Bonds and Hedging with Futures
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Investing in Bonds and Hedging with Futures

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Investing in Bonds and Hedging with Futures

Hello,

I've been reading up on the Fixed Income market and was considering different ways to make money from long term investing in Bonds in these current markets. One idea I had for US 10yr Treasury Notes was as follows;


Buy a 10yr Note at auction (non-competitive) which you hold in your brokerage account. The aim is for interest rates to remain low and even potentially fall due to the continued global economic weakness and fear that raising I.R. too soon could hurt the US recovery. This should lead to lower yields and a higher price for the bond.

Ahead of any I.R. announcements and other policy meetings, take out a hedge position in the futures market (ZN) that will counteract any rate hikes so that if the prices of the 10yr fall, then at least your hedge in the futures market will make money. If rates do rise and the price of bonds fall, then you could look to hold the short position in the ZN, rolling the contract at suitable times (when markets are flat/ranging) whilst then holding your bond to maturity so it expires at Par.

If there are no changes or the Fed decide to lower I.R's then you can use a SL to cut the hedge in an attempt to lose less on the hedge than the price at which the bond you hold will appreciate.


Can any bond traders let me know if this is a feasible idea.

Cheers,

Awls.

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