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Australia vs. USA Bond spread (For beginners)
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Australia vs. USA Bond spread (For beginners)

  #21 (permalink)
Papa Hodler
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CobblersAwls View Post
Hi @s0mmi , glad to have you on this forum, I used to frequent ET too and liked the content you and Wingz posted.


I'd like to ask, is this trade based off the fact that the 2s reflect AU is cheaper than US but the 10s reflect AU is more expensive than US - suggesting some divergence in value where we could expect the spreads to adjust accordingly? To build on this, could you also add another dimension to this trade by trading the AU 2s vs US 2s vs AU 10s vs US 10s? I guess this would be spreading each countries yield curve?


And finally, another Q based off of a post from ET:



Do you still adhere to these rules or have you adjusted your strategy since? I'm mostly interested in point 2 as I have seen many traders this year discuss flipping between certain trading periods for best results (ie for WTI best session times were pre US open but then this changed to pre Asia open etc). Is trading around news and the pre US open still the best periods for volume and price action do you find?


Thanks in advance.

A very common strategy that people play in Bonds is 'follow the leader'.

Interest rate expectations and large amounts of investor money are poured into the short-end as they move around with the probabilities shifting with hike expectations (or cut expectations). This is why placing 10/10 trades by watching the U.S. 2yr and Aussie 3yr are important.

The dimension you mentioned is not really a dimension at all; you're now trading two curves together. But what is your relative value, and what is your idea for each trade? Some people do trade this, in a 'mean reversion' way. But with their own kinks to it... they might plot it on a Day-Chart and when it goes far, they start trading small. I don't like this way because their risk/reward is sh*t house.

Let me tell you, a lot of people who did this trade were lying to me. They would say they enter it here and there, average wide, and they get out. Then I find out from another trade that some of them are just plain lying. They got demolished in them.

And of course you would, you're hedging two curves with each other based off lines on a chart.

I will say this though, when you think the Australian curve has gone far, since its open 20hrs a day, it will adjust based off the American curve. So if you think the Australian curve is very cheap, its not wise to just hold the curve for 20-40hours by itself. It requires hedging with the U.S. Curve (because of our high correlation to the states). We will adjust based off the U.S. Curve. This always works by the way. Sitting in an Australian curve, in this environment, is almost 'naked' now because it's Follow the Leader (USA).

Best periods

When you do research you can find some things like... the most volatility for Oil comes after the Nymex pit session. And hte most volatility/one way disaster for the U.S. Curves comes after the U.S. Pit Open.

When I trade Oil spreads (or the U.S. Curves) I would make sure my 'stop out' is clicking market before the openings of those session periods. The U.S. Curve one is a bit iffy, sometimes it won't do anything. This is where you have to eyeball the chart data and see when it becomes 'dangerous'.

This isn't a hard thing to do, but many people don't do it because they don't think it makes any sense. But I know for a fact, money sleeps and money roars. And it comes into the market its going to come in certain chunks of the day depending on London and New York whales waking up.

Trading News

I seriously avoid trading news these days. As a human with turtle-speed in comparison to the algorithms, there is no edge in hitting into figures or ladders and finding edge there.

If I was in a spread product that involved the U.S. leg (lets say 10-10) and U.S. CPI was coming out... I would be exiting my trade 15-30 minutes before hand if I didn't have any other extra information. Figures can blow you out and its really heart breaking.

We stick to the time-frame because we can always eyeball the history of what moves can happen during that period.

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  #22 (permalink)
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s0mmi View Post
A very common strategy that people play in Bonds is 'follow the leader'.

Interest rate expectations and large amounts of investor money are poured into the short-end as they move around with the probabilities shifting with hike expectations (or cut expectations). This is why placing 10/10 trades by watching the U.S. 2yr and Aussie 3yr are important.

Gotcha - thanks.


Quoting 
The dimension you mentioned is not really a dimension at all; you're now trading two curves together. But what is your relative value, and what is your idea for each trade?

I will say this though, when you think the Australian curve has gone far, since its open 20hrs a day, it will adjust based off the American curve. So if you think the Australian curve is very cheap, its not wise to just hold the curve for 20-40hours by itself. It requires hedging with the U.S. Curve (because of our high correlation to the states). We will adjust based off the U.S. Curve. This always works by the way. Sitting in an Australian curve, in this environment, is almost 'naked' now because it's Follow the Leader (USA).

Yes, I was thinking about this more from a trading the yield curves against each other based on RV rather than the moving average or any indicator. I suppose I would look at the market expectations of rate policy or guidance from each CB and see if one becomes too stretched (as you have pointed out).

On this subject, looking at the US 2s10s and 5s30s we're steadily approaching a flat curve, if it were to go negative would the Aussie curve still track the US curve in some shape or form? Or is it possible we see a break in the correlation? This is really interesting so thanks for the info so far.



Quoting 
Best periods

When you do research you can find some things like... the most volatility for Oil comes after the Nymex pit session. And hte most volatility/one way disaster for the U.S. Curves comes after the U.S. Pit Open.

When I trade Oil spreads (or the U.S. Curves) I would make sure my 'stop out' is clicking market before the openings of those session periods. The U.S. Curve one is a bit iffy, sometimes it won't do anything. This is where you have to eyeball the chart data and see when it becomes 'dangerous'.

This isn't a hard thing to do, but many people don't do it because they don't think it makes any sense. But I know for a fact, money sleeps and money roars. And it comes into the market its going to come in certain chunks of the day depending on London and New York whales waking up.

Sorry if this Q is a bit dense, but I just wanted to clarify. So if we say that we are trading oil and the most volatility comes after the close of the nymex pit session, if you have a spread on, you would look to close it ahead of the nymex pit close...but would you then be open to putting a spread back on again during the out of hours session, to take advantage of some of that volatility? As I understand a lot of prop traders like/need volatility to trade? Or do you prefer to avoid the periods of volatility and just trade during quieter periods when the markets are ranging or trending nicely?

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  #23 (permalink)
Papa Hodler
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CobblersAwls View Post
Gotcha - thanks.



Yes, I was thinking about this more from a trading the yield curves against each other based on RV rather than the moving average or any indicator. I suppose I would look at the market expectations of rate policy or guidance from each CB and see if one becomes too stretched (as you have pointed out).

On this subject, looking at the US 2s10s and 5s30s we're steadily approaching a flat curve, if it were to go negative would the Aussie curve still track the US curve in some shape or form? Or is it possible we see a break in the correlation? This is really interesting so thanks for the info so far.




Sorry if this Q is a bit dense, but I just wanted to clarify. So if we say that we are trading oil and the most volatility comes after the close of the nymex pit session, if you have a spread on, you would look to close it ahead of the nymex pit close...but would you then be open to putting a spread back on again during the out of hours session, to take advantage of some of that volatility? As I understand a lot of prop traders like/need volatility to trade? Or do you prefer to avoid the periods of volatility and just trade during quieter periods when the markets are ranging or trending nicely?

The Australian curve is really simple because it doesn't have many different baskets of bonds and durations popping in and out (unlike America or Germany for example).

It's more of a 'line' than a curve.

This doesn't mean its easy to make money, by the way. It just means that it is a lot more simple when it comes to Data releases, short-end bond movement, and RBA (Central Bank) commentary with the Aussie Dollar (Currency) movement.

I have been trading for almost 7 years now and trust me, there has never been a true and consistent break in the correlation. Some blow-outs have happened, of course, but there is a running joke I created that Australia is the 51st state of America.

I'm not kidding. We ALWAYS adjust based off the American notes. It's insane.

When you look at U.S. GDP as a percentage of the world, it's like 40-44%. Australia is very small. We are an island in the middle of nowhere. We are dragged by two forces;

1. China, and
2. America

China doesn't have Bonds and the 'link' to China that we get is through the prices of commodities (iron ore, coal etc.). So the only Bond/interest-rate/currency link we have will be America.

Here's a picture of the 10-10 chart over many years (Daily Continuation):
https://pasteboard.co/H108EZ2.png

You can see how the correlation never breaks down. Australia is a follower. America is a leader. The central bankers are mostly rich-boy f@ggots and insiders. They all suck each other off under the table. They are VERY hestitant to execute policy which goes against America. They're all in bed with each other. This is why the correlation is here to stay for as long as you and I are alive.


About volatility

This is a great question. Remember that sexy volatility a measure of the continuity of up and down moves. You can look at a chart and go "Oh wow, even the wrong-siders were bailed at one point". Volatility allows you to make money even when you're wrong.

In these times, in these VIX conditions, with the S&P500 and credit growth saying "Nothing can possibly go wrong", with China still pumping along fine.... Oil's NYMEX pit session can have some HARSH moves when it moves one way.

Here's an example of a Crack spread (Oil to Gasoil) showing you a f*cking blow-out that can end your quarter in a very negative way;

https://pasteboard.co/H10atRK.png

Notice how the blow-out is insane and there was barely any juice in the middle to make some of your loss back before the move happens.


Now in the next picture, i'm just going to grab you a random day from 2012.


https://pasteboard.co/H10bFwC.png

Notice how there is still a vicious move at the end... but look at the activity before hand. We go back and forth so many times that a trainee sitting there can just scalp money around and just call it quits by the time Nymex comes.

2012 had a higher VIX, more geo-political risk and events, there was Greece potentially going bankrupt, China's figures being dodgy... so quite a few big risk events. In 2017 we have NOTHING. We have "Maybe North Korea will stop being f@ggots one day."

Once again, lowest volatility in 1965. Safest year for long equities, investment, borrowing, credit growth, and gambling that's ever recorded in 70 years. No-body lost money except those who are short-term Traders.

Nymex Pit

When it comes to the main pit session opening, there is definitely some aggression which appears most days that can send the spread one way or another. The problem is that me and you are not the big players and we don't have access to their Market Book order and we don't know which Tanker has gone up/down, what route has been compromised for the day/month, or any of the core fundamentals which may give reason for some big guy to thrash the oil spreads/prices one way during this session.

Until we do, it's best to trade Asia + Europe, right up until that Nymex session.

I backtested a strategy where I would begin trading it again about 2 to 2.5 hours after the Nymex pit opens. Unfortunately it's about a 50/50 strike rate for the past 6 months. There is no edge in it that I could find. We should see the Nymex pit session as a "Fundamental pricing" of the commodity, instead of something we should dig our paws in.

Of course, though, I'm coming from a perspective of

1. being a human (I don't have any price-action reading algorithms and that go with momentum and sniff orders etc.)
2. longevity (in the long run, I wouldn't want to be stepping in against guys with lots of money who are battling it out)

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  #24 (permalink)
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s0mmi View Post

Ratio/Spread Tick and Hedge Calculation:
Aussie HXS/XT 10yr Tick = $51au per 1-lot = $102au per basis point x 0.75 = $76.50 USD
USA TYA Tick = $15.625 = $78.125 USD

Ratio is about 1-lot to 1-lot


and from elsewhere...


s0mmi
3yr/10yr ratio = 101/30 = 3.33 times more 3yrs needed = 33 YT (3yr) to 10 XT (10yr)

Hi s0mmi

In practical terms, does this mean:

1. for "aussie 10yr: us 10 yr" I put into my 2 DOMs: 1 contract for the aussie DOM, and one contract for the US DOM?

2. and for the aussie 3yr/10yr I put into my 2 DOMS: 33 (or 3) contacts for the "3yr DOM", and 10 (or 1) contracts for the "10yr DOM"? (assuming 33:10 is approx 3:1)

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I'm still getting my head around how CQG charts treasuries according to their basis value, and not as individual contracts like TT.

Also still working out charting "2yr aussie yeild vs 2yr US yeild" on CQG, but I have plenty to keep me busy till then, so not too worried.


Last edited by adam777; January 27th, 2018 at 01:32 AM.
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  #25 (permalink)
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s0mmi View Post
Now you're getting somewhere. I've actually spotted a trade here for you right now;

I have charted for you; Australia's 2yr yield differential against the U.S. 2yr yield differential;

Notice that the line has dipped below the moving average that I've created. This is showing some weakness in Australias prices relative to America.

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Now this picture with the Green Moving Average, is the Australian 10yr vs. U.S. Tnote spread. Notice that its diverging above the green line.


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So what we're looking at right now is a trading opportunity. The Australian 10yr product is expensive (on a 15-min timeframe) relative to America.

You would sell 10-lots of the HXS/XT (Aussie 10yr) and buy 8 lots of the U.S. Tnote (TYA/ZN)

Now obviously because its a spread, start slow, be prepared to take a wide range, and aim for like 1bp or something.

I have more answers but you need to ask.

This is an example of a consistent trade that, when it appears, you should take it.

This can be replicated across many country yield curves btw.

I strongly advise staying away from outright trading based off past-performance indicators. I can explain why in another post.

How do you know the 10yr is overpriced? It could mean the 2yr is underpriced. What information do you use to determine which one is leading?

Sent using the futures.io mobile app

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  #26 (permalink)
Papa Hodler
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adam777 View Post
and from elsewhere...



Hi s0mmi

In practical terms, does this mean:

1. for "aussie 10yr: us 10 yr" I put into my 2 DOMs: 1 contract for the aussie DOM, and one contract for the US DOM?

2. and for the aussie 3yr/10yr I put into my 2 DOMS: 33 (or 3) contacts for the "3yr DOM", and 10 (or 1) contracts for the "10yr DOM"? (assuming 33:10 is approx 3:1)

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


I'm still getting my head around how CQG charts treasuries according to their basis value, and not as individual contracts like TT.

Also still working out charting "2yr aussie yeild vs 2yr US yeild" on CQG, but I have plenty to keep me busy till then, so not too worried.

1. Yes, put the two DOMS next to each other. Side by side.
2. Your dom should be... 3yrs... 10yrs... T-notes. Left to right. Its simple.

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  #27 (permalink)
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s0mmi View Post
1. Yes, put the two DOMS next to each other. Side by side.
2. Your dom should be... 3yrs... 10yrs... T-notes. Left to right. Its simple.

I've been using the DOMs side by side with TT for the last 6 months. I was just confirming the number (/ratio) of contracts in each DOM for the 10/10yr, and the 3/10yr.

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  #28 (permalink)
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The 1010s (AUS 10s to US T-Note) is typically traded at a ratio of 1:1.

The Aus Curve (AUS 3s vs Aus 10s) is currently traded at a ratio of 33 * 3yrs to 10 * 10yrs. You can also bring up the spread ladder in CQG which is YTXT33H8.

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  #29 (permalink)
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Hey s0mmi, just curious but if the spread starts moving against your position, do you look to scalp around in the Tnotes/aussie 10s to improve pricing or reduce the losses until you can get out? Or do you simply hold it until your stop parameters get triggered and you take the loss?

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  #30 (permalink)
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Blehs View Post
Hey s0mmi, just curious but if the spread starts moving against your position, do you look to scalp around in the Tnotes/aussie 10s to improve pricing or reduce the losses until you can get out? Or do you simply hold it until your stop parameters get triggered and you take the loss?

This is a million dollar question and most f@ggots will not give you a real answer. The decision whether you add or reduce your position depends entirely upon your research. I hate saying the word 'depends' so let me explain:

Volatility is tighter and the market-maker d1ckheads are now in the SFE and hedging the hell out of every order (i.e. Jump, Citadel etc.)

This means that it is locked way too tight to the U.S. T-note almost 24 hours of the day. This also implies that we can't rely simply on Ten-Ten to make a living, but it can be 1 out of your 5-10 trades that you watch every day. They came in April 2017.... so if you want to analyze behavioral patterns in the spread, start all your research Jan 2017 onwards.

The first thing you should do is do your chart research and find out basic metrics in an Excel sheet:
1. Write down the net-change of the spread every day
2. If there was a big move or a move that finishes the spread on its low or high (by end of U.S. session) then observe what data came out that day (ForexFactory)
3. Open the Aussie Dollar up to check if there was any significant move in that

If you go back in-time you can get an idea of what a small, medium and big move is. Now you have an idea of the region you can add to your position. You will notice things such as, when the spread moves more than 3 BP (6 XT ticks) from Aussie morning open (8:30am) then it has a higher chance of only coming back 1-2 ticks at most.

Important: Write down the session that most of the move occurred in. (Compare between Asia / Europe / USA session)

Every strategy is going to have its own nuances that you want to focus on. Australia follows the U.S.A because it just does.

When you have mapped out what the moves are, you can then give yourself a 'region' to play your bullets in. You don't want to be too active obviously. 99% of the time when there's a trade there's only 1 in the day for the spread if you're trading this way.

Strategy: Now for some edge. You don't have to limit yourself to just taking the opposite of a move. If you go through your research, check your results if you go in the same direction as the Asia session move. You might find that if the Asia session has moved 4 ticks or more, then buying 1-2 ticks into Europe will give you decent profit.

Once again I have to stress that simply relying on this is not enough for a career. The SFE opened the flood-gates and we will never see order flows moving the Aussie bonds wildly again.

Now, if you spend 1-weekend on this spread... the next weekend on another spread... and so on, you will have researched 4 spreads by the end of the month. And that way, you don't have to over-trade in one saturated market.

My traders are going with this philosophy. I really do think the days of specialising in 1-2 things are done.... 5-10 = better. Smaller size, less stress, more play.

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