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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Daniel Chisholm who wrote (1921)	7/2/1999 11:44:00 AM
From: Henry Volquardsen	Read Replies (2) \| Respond to of 3536

Hi Daniel, first minor point, cutting my long so I can go to lunch :) second minor point. I don't believe LTCM had a very significant exposure to off-the run vs on the run. The basic spread that hit them was the TED spread, Treasuries vs corporate risk. on the trade you outline. First,don't believe the spreads you see in the paper. Second, professional traders do in fact put on trades of on the runs vs off the runs. Third, the spread is not stable. I moves around a lot and varies from issue to issue. You can't assume that two different off the run issues will trade at the same spread to the on the run. But the most important part of the equation you are missing is repo. You are short physical treasuries, you will have to repo them. and if you repo the short you will need to repo the long or put up a lot of capital. Repo has a bid/offer as well, a large one. And the repo rate is different for each bond. If one goes on special and the other doesn't you could get hammered. Also most repo traders don't like going much beyond a couple of days. This way they can get another chance to rifle your pockets in a few days. This will add significant transaction cost. Many a good trade has fallen to the knife of the repo man. This is not a trade for individuals. You really need to be a market maker. Henry