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

To: Michael Friesen who wrote (314)	6/29/1998 3:28:00 PM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 3536

Michael, The all other things being equal caveat is relatively broad when it comes to interest rates. Sufficiently so that I think the debt/GDP ratios come fairly far down the list of what the market looks at. Far enough that there are so many other factors that it is hard to find much impact. There are a lot of currencies with very bad ratios that have low interest rates. And a few with fairly good ratios with high rates. Inflation trends, for example, have a much bigger impact. You are correct in how shorting cash bonds work. The short has to borrow the bonds and is therefore responsible for paying the owner the fixed rate. Meanwhile he can only invest at short term rates. It is not really a short squeeze as the underlying security remains plentiful. It is more of a bad carry trade. Think of it as the cost of financing a short. If the cost is high enough it makes it very expensive to finance a short unless the price is continuing to decline. Stable prices are deadly. That is why bear markets tend to be choppy, shorts are always trying to avoid the carry. Bull markets tend to be more stable as the cost of carry works in the specs favor, when the market is stable he has no need to jump out of the trade because he is earning the carry. It is tough to give a number for average leverage. It doesn't function in a straight forward way as in equities. It is tough to pin this number down for financial institutions. Hedge funds however tend to leverage 10 to 20 times capital. Henry